The The Governor's Governor's
Concluding Concluding Remarks Remarks
Annual Report
Rome, 31 May 2022
year
financial
128th
th
Year
128
2021
Financial

The Governor's
Concluding Remarks
Annual Report
2021 - 128th Financial Year
Rome, 31 May 2022

Ladies and Gentlemen,
The invasion of Ukraine by Russia at the end of February marks a dramatic
watershed in recent history. It has triggered a grave humanitarian crisis,
leading to the re-emergence of tensions between different parts of the world
that seemed to have been permanently reduced, if not completely allayed, in
the last thirty years. Our first thought today goes to the people of Ukraine, to
those who have lost their lives, to those who have been forced to abandon their
homes, and to those who have had their daily existence turned upside down.
The war has also abruptly worsened global economic growth prospects, at
a time when the damage caused by the pandemic has not yet been completely
repaired. Uncertainty has dramatically increased the world over, affecting the
pillars supporting the international economic and financial framework in
place since the Cold War, namely the peaceful coexistence between nations,
market integration and multilateral cooperation.
The economic outlook and the impact of the war in Ukraine
The progressive worsening of geopolitical tensions has significantly
accentuated the rise in energy prices associated with the recovery of economic
activity after the public health crisis. Above all, this has been reflected in
the price of gas in Europe which has risen on average to about €90 per
megawatt-hour since last September, with peaks of around €200, compared
with just over €10 per megawatt-hour in the months preceding the pandemic
(Figure 1). The increase was much smaller in the United States, rising from
almost $10 to around $20 per megawatt-hour.
Although Russia only accounts for 2 per cent of world trade, it is one of
the main exporters of oil and gas, fertilizers, and, along with Ukraine itself,
cereals. According to market quotations, the prices of these products are
likely to remain very high in 2022, going down only slightly over the next
two years. Higher food prices and supply difficulties risk hitting, above all,
the most vulnerable sections of the world population and those countries that
most depend on food imports.
The conflict in Ukraine is slowing the world economy significantly
and the recent measures adopted in China to counter new outbreaks of the
virus are exacerbating this trend, rekindling the global value chain problems
already seen in 2021. The International Monetary Fund estimates an increase
in global GDP of 3.6 per cent for this year, almost 1 percentage point down
on January's projections and about 1.5 points lower than those for October.
Inflation, which in all economies largely reflects increases in commodity
prices, is expected to remain high and then to fall in 2023. This scenario
is based on relatively favourable hypotheses as regards prices and supplies
of food and energy, hypotheses that are closely tied to how the conflict in
Ukraine will develop and to the consequent sanctions against Russia. The risk
of a more marked slowdown in the economy should not be overlooked, also
because of the still uncertain development of the pandemic.
The cyclical outlook also deteriorated in the euro area, which is particularly
exposed to the economic effects of the conflict. The most recent estimates
suggest that GDP growth will be less than 3 per cent this year, well below what
was forecast a few months ago; an increase already largely acquired thanks
to the strong recovery in 2021, and that therefore implies only a modest
expansion of the economy over the course of this year. There is a significant
risk of a less favourable trend. As for the other economies that import energy
products, the supply shock has serious repercussions on demand as well: the
worsening of the terms of trade negatively affects the resources available to
households and firms, curbing consumption and investment. In addition, the
widespread decline in confidence and the fragility of international trade are
contributing to the weakening of the outlook.
In April, consumer prices recorded an increase of 7.4 per cent compared
with the same month last year, driven by the price rises for energy and, to a
lesser extent, for food (Figure 2). Net of these components, inflation stood at
3.5 per cent, in turn influenced by the transmission of higher energy costs to
the final prices of other goods and services. In the United States though, core
inflation, at 6.2 per cent, is only 2 percentage points below overall inflation,
mainly as a consequence of demand overheating.
The latest forecasts of the main international institutions and private
analysts indicate that price growth in the euro area will remain high this year
and then fall considerably in 2023, returning to levels consistent with the
European Central Bank's definition of monetary stability, namely inflation
at 2 per cent in the medium term (Figure 3). The expectations of market
operators, inferred from the quotations of financial assets index-linked to
consumer prices, are in line with this profile.
The uncertainty of these forecasts is far greater than a year ago. In
the last few months, the size and persistence of the price rises have been
underestimated, including in central bank projections. Given the faster than
expected recovery in global demand, the emergence of supply bottlenecks has
driven up the prices of intermediate goods everywhere. However, in the euro
area, the main factor has been the exceptional increase in energy prices that
began at the end of the summer in relation to the geopolitical tensions. The
worsening of these tensions, culminating in Russia's attack on Ukraine, is the
main reason for the persistence and spread of the inflationary pressures we are
witnessing today.
The worsening of the terms of trade and the loss of purchasing power will
tend to hold down final demand, easing the pressure on prices. However, we
should not overlook the risk of an increase in inflation expectations above the
medium-term objective and the start of a wage-price spiral. At the moment,
expectations are not very far from the 2 per cent objective and, unlike what
has happened in the United States, wage growth in the euro area has been
moderate so far, even if very high wage demands have been advanced in some
countries (Figure 4). If these ended in one-off increases in wages, the risk of
starting a vicious circle of inflation and wage growth would be reduced.
The economic outlook has therefore changed considerably in the last few
months. Given that the risk of deflation, which had called for the introduction
of unconventional monetary policy measures, has been averted, and the impact
of the pandemic on final demand has faded, the negative key rates policy can
now be left behind. A raise in these rates, which the ECB Governing Council
might decide to start in the summer, should proceed by taking account of
the uncertain evolution of the economic outlook. Financing conditions for
households and firms, which are today exceptionally accommodative, will
remain favourable; according to current market quotations, short-term
interest rates in the euro area will stay negative in real terms for several years
to come.
The Governing Council stands ready to adjust all its instruments to
pursue its medium-term inflation aim. During the pandemic crisis, flexibility
in the design and conduct of asset purchases was crucial to counter tensions
on the financial markets; it remains a key element in our strategy in the
event that malfunctions in the monetary transmission mechanism risk
compromising the pursuit of price stability. To address rapidly evolving needs,
particular attention will have to be paid to ensuring that the monetary policy
normalization process takes place in an orderly manner and to preventing the
emergence of any market fragmentation that is not justified by the economic
fundamentals.
The action of the Eurosystem is still intertwined with that of the fiscal
authorities. The increase in commodity prices cannot be directly countered
by monetary policy. What monetary policy can do is ensure price stability
in the medium term, maintaining the anchoring of inflation expectations
and countering pointless wage-price spirals. Temporary fiscal interventions,
carefully calibrated to protect the soundness of the public finances, are able to
limit rises in energy prices and to support the income of the households most
in difficulty, in both cases reducing pressures to increase wages. This allows
for a more gradual normalization of monetary policy, mitigating the risks of
a recessive impact on the economy.
In Italy, the expansion of GDP in 2021, equal to 6.6 per cent, amply
surpassed expectations, mainly reflecting strong investment and the recovery
of exports. Although the energy deficit has doubled, the current account
side of the balance of payments has remained broadly positive, thus helping
to strengthen the positive net international investment position. The wide
gap between nominal GDP growth and the average cost of the debt led to
positive results for the public accounts. After the significant rise in 2020, the
debt-to-GDP ratio fell by more than 4 percentage points to less than 151 per
cent, while one year ago, when a much higher deficit had been forecast, an
increase to about 160 per cent was expected.
Italy's economy, together with that of Germany, is among the worst
hit by the increase in the price of gas, because of the high share of imports
from Russia and the importance of the manufacturing industry, which makes
intensive use of gas. In January, our forecasts indicated that GDP would
return to pre-pandemic levels about half way through this year and that there
would be a solid expansion of above 3 per cent on average in the two-year
period 2022-23. The war has radically accentuated the uncertainty over these
prospects. Production activity weakened in the first quarter, also affected by
the resurgence of the virus, and it should strengthen moderately this quarter.
In April, we calculated that the protraction of the conflict in Ukraine could
mean about 2 percentage points less growth overall, for this year and the next.
The most recent forecasts of the main international organizations are similar.
However, more adverse developments cannot be ruled out. If the war should
lead to an interruption in the supply of gas from Russia, GDP could decline
on average over the two years.
Inflation reached 6.8 per cent in March, its highest point since the start
of the 1990s; it fell by half a percentage point in April, thanks to the recent
measures on fuel, electricity and gas. Until now, there has been no sign of price
pressures being transmitted to salaries, partly because of the characteristics
of Italy's collective bargaining system, designed to limit the repercussions of
increases in inflation due to energy shocks. Other factors include the still
incomplete recovery in terms of the number of hours worked, the reduction
of profit margins observed in 2021, and the government measures to reduce
the impact of the energy crisis on household and business incomes.
The increase in imported commodity prices is an unavoidable tax for the
country. Government action can redistribute the effects of inflation between
households, factors of production, and present and future generations, but
it cannot wipe out the overall impact. As regards households, interventions
calibrated according to their general economic condition rather than
individual incomes are more effective in countering the repercussions of
inflation on inequality. Among other things, targeted measures enable the
role of prices to be better preserved as an incentive to invest in renewable
sources and to save energy.
Despite the deterioration of the economic outlook, the most recent
assessments by the European Commission indicate that the debt-to-GDP
ratio will continue to decline both this year and the next. In the last few
weeks, we have nevertheless observed an increase in the yield spread between
Italian government securities and the corresponding German Bund which,
for ten-year bonds, has repeatedly gone above 200 basis points. This sudden
increase does not reflect any abrupt changes in the underlying economic
conditions: the net international investment position is robust, Italy's
producers are successfully competing on the outlet markets, and the level of
household and business indebtedness is low by international standards. The
increase does, however, call attention to the structural fragility represented by
the high level of public debt; it confirms the need to continue firmly on the
path towards gradually strengthening the public accounts.
Although varying in severity across countries, the economic consequences
of the war in Ukraine, like those of the pandemic, are affecting the whole of
Europe. There was a common response to the pandemic, which included
the Next Generation EU (NGEU) programme. The Commission has now
proposed to expand it with the REPowerEU programme to put an end to
dependence on fossil fuel imports from Russia. European initiatives could
prevent unfavourable shocks from exacerbating the differences between
national economies and financial market fragmentation risks, ensuring a fiscal
policy stance that is more suited to conditions in the euro area. The main
beneficiaries of the NGEU programme, of which our country is undoubtedly
one, are responsible for demonstrating, in a concrete way, what milestones a
stronger and more cohesive Union can achieve.
There has been discussion for some time about the advisability of
completing the institutional framework of the Economic and Monetary
Union by endowing it with an adequate common budget. This would have
a stabilizing effect and guarantee the supply of European public goods to be
offset by own resources or debt issuance. This innovative approach could help
resolve the asymmetry between the many different national fiscal policies
and the single monetary policy, although this would require amending the
Treaties, which is a long process with uncertain results.
Without involving Treaty changes, one possible - and less ambitious -
solution could be to set up an instrument to be used as needed, avoiding having
to create ad hoc programmes each time, as happened after the sovereign debt
crisis and during the pandemic. In this way, confidence would be bolstered in
Europe's capacity to intervene promptly when necessary. The new instrument
could finance common projects of an exceptional nature or help with the
macroeconomic stabilization of the European area in response to a shock of a
certain size. Following the example of the NGEU programme, funds would
be raised via the issuance of EU debt and then transferred to the member
countries to be employed judiciously and for uses agreed at European level;
the servicing of this debt would be guaranteed by adequate own revenues.
This innovation could accompany the ongoing reform of the Stability
and Growth Pact. Today, there seems to be a consensus not only on the need
to renew the Pact, but also on some of the desirable characteristics of the
new system of rules. It should continue to guarantee the sustainability of
public debt, while taking account of the differences in macroeconomic and
structural conditions between the various countries. To ensure simplicity and
transparency, the role of unobservable items, such as the structural deficit or
potential GDP, should be limited as much as possible.
Starting with these points of agreement, which are also clearly present
in the proposals for reform advanced by the governments of some euro-area
countries, a framework of rules that is simpler and more flexible, but which
preserves budgetary discipline, could be centred on medium-term programmes
agreed with the European Commission and approved by the Council of the
European Union. These programmes, based on realistic macroeconomic
projections and subject to independent validation, should indicate debt
objectives and time horizons for their achievement, specific to each country,
going beyond the uniform criterion of reducing the debt-to-GDP ratio
in line with the current rules; they should also set out a multi-year profile
for net borrowing consistent with these objectives. Deviations from this
profile that are not due to any unforeseen macroeconomic factors, would be
subject to corrective mechanisms similar to those currently contained in the
excessive debt procedure. If the budget instrument I have alluded to were to
be introduced, access to common resources could be bound to compliance
with these programmes.
As we have argued on more than one occasion, there are also very sound
reasons for adopting forms of common management for a part of the national
debt issued in the past - for example, the component relating to the pandemic
emergency - by means of a European fund that would buy a share of existing
public sector securities, financing itself on the market. While I am well aware
of the political difficulties that such an initiative would encounter, it must
be underlined once again that it would make a significant contribution
to strengthening the stability of the euro area as a whole and to creating a
supranational public sector bond market of adequate depth and liquidity, with
positive effects also for the completion of the banking union and the capital
market union. The activity of this kind of European fund would be structured
in such a way as to avoid the systematic transfer of resources from one country
to another and to maintain the incentives to conduct fiscal policy responsibly.
The risks for the international scenario beyond the short term
The governance of globalization and international equilibria have been
under consideration for some time now, driven by the serious shocks that
have hit the world economy one after another in the last 15 years, by the
distributional consequences of this process in various countries, as well as
by the gradual changes in the relative demographic, economic and political
importance of the advanced and emerging countries (Figure 5). The war in
Ukraine risks diverting the course of this essential rethinking and leading us
towards a world divided into blocs, with fewer movements not only of goods,
services and financial capital but also of technologies, ideas and people.
With the end of the Cold War, over the last thirty years, the opening
up of trade and technological progress have generated profound changes.
Billions of people that had hitherto been excluded have had access to global
markets, resulting in an unprecedented expansion. Today, world GDP is
two and a half times what it was in 1990, per capita GDP has increased by
75 per cent and international trade has more than quadrupled (Figure 6).
In some areas of the world, particularly in the emerging countries of Asia,
the economic development and the improvement in living conditions have
been extraordinary. Despite the increase in the world's population - from
five to eight billion, more than 90 per cent of which in the emerging and
developing economies - the number of people living in extreme poverty has
declined considerably, from almost two billion to below 700 million, with
the exception of sub-Saharan Africa.
Efficiency gains, generated by exploiting economies of scale, differences
in productivity and in the availability of production factors between countries
and economic areas, have been increased by the organization along global
value chains in which around half of international trade took place, prior
to the pandemic. At the same time, capital flows have continued to support
economic integration, ensuring a better allocation of resources and greater
risk diversification.
This process has not been without uncertainties and difficulties. The
way in which capital moves has changed, and the role of non-banking
financial intermediation has grown considerably since the global financial
crisis. While the riskiness of the banking component has been attenuated
by a wide-ranging reform of the rules and by micro- and macro-prudential
policies, the increasing diversification in sources of funding for the economy
has been accompanied by episodes of marked volatility. The lengthening
of value chains has accentuated firms' financing needs; for those operating
in emerging economies and less developed countries, the large share of
foreign currency debt has increased their vulnerability to external shocks.
The reproduction on a global scale of just-in-time organizational planning
models has heightened the fragility of production chains and the risks of an
international propagation of local production difficulties.
Globalization has also leveraged the regulatory differences between
countries, especially regarding the taxation of profits, environmental
sustainability and protecting workers. Furthermore, despite the significant
reduction in per capita income gaps between countries, the inequalities
in wealth and income distribution have increased sharply within many
economies, especially the advanced ones, giving rise to calls for greater
social protection and undermining trust in the benefits of globalization
and technological progress, in part because of the lack of adequate national
policy responses. The repeated external shocks, as well as amplifying income
volatility, have increased the uncertainty over individual economic prospects
and contributed to generating widespread insecurity.
The pandemic, with the marked fall in international trade and the
supply chain bottlenecks for some intermediate goods, and the Russian
invasion of Ukraine, with its repercussions for energy and food supplies,
could push towards a reorganization of international trade that favours the
resilience of supply, especially in strategic sectors. In this situation, trade
could be concentrated within areas comprising countries that are politically
like-minded or united by regional economic agreements.
However, a division of the world into blocs would risk jeopardizing the
mechanisms that have stimulated growth and reduced poverty at global level.
A reshaping of the dense network of interdependencies among countries
would be difficult to achieve without tensions or marked adjustments in
the prices of goods, services, and financial and real assets, even if it were
spread out over time. The allocation of global savings would inevitably be
less efficient, and the funding of the public and private debt of individual
countries would be more difficult. A fragmentation along borders drawn by
political security considerations, albeit necessary ones, could have extremely
negative consequences for smaller economies, especially emerging and
low-income ones that do not benefit from participation in consolidated
regional economic areas.
In a world divided into blocs, we would also and above all lose that
wealth of mutual trust, however fragile and uncertain, that, as well as being
indispensable for nations to co-exist peacefully, is an irreplaceable foundation
for tackling the key challenges for future generations. Limiting global
warming, fighting against extreme poverty and combating pandemics are
formidable objectives that no country can face alone. The experience of Italy's
G20 Presidency last year showed that, despite considerable and increasing
difficulties, acting in concert can achieve important results, although it must
be acknowledged that it is made more arduous by the altered political context.
A change of direction that aims to blend the benefits of globalization
with policies framed to limit its negative consequences is indispensable. It
must be based on an open discussion of the rules and governance of the
global economy, which leads to a new international balance, taking account
of the greater importance of emerging countries and the need to guarantee
fundamental respect for the founding principles and values of peaceful
coexistence among nations.
Otherwise, the most vulnerable and the poorest social groups and
countries would pay the highest price of a disorderly 'deglobalization',
although there would be no shortage of pressures on advanced economies, and
on Europe in particular. More than half of the increase that is forecast for the
world's population, of two billion over the next thirty years, will be in Africa:
a steady and sustainable development in this continent's economies is crucial
for reducing extreme poverty and guaranteeing a substantial improvement in
the social and economic prospects for those living there, as well as for averting
the emergence of migration flows that would be difficult to manage in terms
of scale and size.
Difficulties, trends and challenges for the Italian economy
The restructuring that took place in the decade prior to the pandemic
enabled Italian firms to face the crisis from a relatively sound financial
position. A recovery in competitiveness has been underway for some time.
The financial system, which has also become stronger, is capable of providing
the production sector with adequate support. The renewed confidence in
Italy's economic outlook had fostered a return to growth in investment and
facilitated the recovery, which is now being impacted by the consequences of
the war in Ukraine.
The progress made, though partial, indicates that the Italian economy
can overcome the weaknesses that are slowing its development, in order to
end the stagnation in productivity, counter the effect of demographic trends
on labour supply and reduce the weight of public debt, which has risen
considerably with the pandemic crisis (Figure 7). The National Recovery
and Resilience Plan (NRRP) is a crucial tool for successfully tackling this
challenge.
The Plan, which is on a significant financial scale, marks a sharp break
with the past in drawing up economic policies. It sets out a comprehensive
strategy for modernizing Italy, combining reform plans and public investment
with private investment, thereby helping to bring about the digital transition
and the ecological or 'green' one. It introduces profound innovations to how
measures are implemented, by setting specific targets, also for programmes
managed at local level, outlining the interventions needed to overcome the
regulatory obstacles that could hold back their achievement and establishing
milestones and targets, supported by an extensive monitoring system.
The NRRP does not cover all the interventions needed or Italy's financial
commitment; it is flanked by other significant reforms to be implemented,
such as that of the tax system, and resources allocated by the national budget
to spending programmes with similar objectives. However, it does provide
an opportunity to close the accumulated lags in tangible and intangible
infrastructures in a short space of time, to boost R&D, to improve the
education system and to step up investment in new technologies, which are
all key factors for accelerating productivity and strengthening our economy's
growth potential. To ensure its success, the design and implementation of
the reforms will have to be capable of profoundly changing the landscape in
which economic activity takes place; the Plan's innovative approach could
become common practice for public interventions.
The fact of having drawn clear lines for industrial development based on
green and digital technologies and on support for research and innovation
could contribute to reinforcing and expanding the most dynamic segment
of the production system. There is no lack of entrepreneurial excellence; the
productivity of medium-sized and large Italian firms and their ability to reach
international markets are comparable to those of similarly sized French and
German firms, but their share of employment and of value added is still
insufficient. In Italy, firms with more than 250 employees, which on average
have better managerial and organizational resources and a greater capacity for
bearing the costs of innovation and adapting to the green transition, account
for less than one quarter of persons employed, about half the figure for France
and Germany (Figure 8).
The action aimed at improving the functioning of public services and the
regulation of economic activity is an integral and in many ways essential part of
the Plan. Regulatory interventions are expected in many areas, as are suitable
resources to support the digitalization of government entities, enhance the
skills of public sector employees and organize judicial offices more effectively.
The measures implemented in previous years have enabled some progress
to be made: digital access to government and local authority services has
expanded considerably, and the number of pending court cases has fallen by
one fourth since 2015. However, the complexity and instability of the rules,
the unwieldy nature of administrative proceedings and the shortcomings in
the functioning of the public administration and the justice system continue
to be substantial. These are factors that are still limiting the willingness to
invest in our country, and in the South in particular, undertaking large-scale
business initiatives.
Drafting the legislative and regulatory measures included in the Plan
requires considerable commitment in order to ensure compliance with the
deadlines agreed upon with the European Commission. Of the interventions
to be completed in the first half of this year, the enabling law for reforming
the Public Procurement Code is particularly important. Over the next few
months, the process for approving the law on competition will need to be
completed, allowing the numerous associated acts to be implemented.
Progress has also been made with the tax system: the recent revisions of
personal income taxation have corrected clear anomalies in the structure of
marginal effective tax rates, and the fight against tax evasion has benefited
from the introduction of regulatory and technological innovations, such as
electronic invoicing. The inclusion of future interventions in a comprehensive
reform, the need for which has been pointed out many times, would make
it possible to design the system in a less distorted way, give it stability and
make further inroads in fighting evasion. The sustainability of the public
accounts will in any case have to be preserved, providing for full coverage
of the measures adopted. Limiting ourselves to intervening on individual
aspects of taxation would fuel the process of regulatory stratification. The
uncertainty stemming from frequent modifications - not always especially
consistent from one to the next or over time, and with retroactive effects -
and from the lack of continuity in the interpretative guidelines and in the
case law is a severe barrier to economic activity.
Overcoming the factors that hinder productivity growth has become
even more necessary given the demographic projections, which point to a
downward trend in the labour force that can only partly be countered by an
improvement in the migration balance and by an increase in labour market
participation. Istat's most recent projections show that over the next 15 years,
the population aged 15 to 64 will fall by 13 per cent (about five million
people, half of whom in the South); the cohort of those aged between 24
and 70, useful to account for the projected increase in the years spent in
education and work, will decrease by just under three million.
Over the last ten years, the lack of suitable work opportunities has driven
almost one million Italians to move abroad, many of whom are highly educated;
by contrast, there are increasingly fewer people, often with low skill levels, who
transfer from abroad to Italy. Adequate policies for planning migration flows,
training and integration are lacking. The labour market participation rate is
among the lowest in Europe, especially in Southern Italy. The participation
rate for women, equal to 55 per cent in Italy compared with an average of 68
per cent for Europe, is 18 percentage points lower than that for men (Figure 9).
To narrow the gap, among other things, the obstacles that mothers face in
re-entering the work force after having children must be removed. The NRRP
funding for services for families is a first step in this direction.
Employment opportunities and the choice of whether to participate
are closely connected with educational attainment, which should be raised
quantitatively and qualitatively starting from secondary school, where there
is still a high rate of abandonment and learning outcomes are unsatisfactory.
Despite the progress made, there is still a bi