italian banking association annual meeting address by the governor of the bank of italy ignazio visco rome, 12 july 2017 the current economic scenario and the outlook the italian economy has gained strength. the latest economic indicators confirm that production is picking up. all in all, the most recent surveys of households and firms signal persistently high levels of confidence and a resumption of investment ; the outlook for exports and employment remains favourable. the upturn in growth has had a positive impact on lending, even though firms ’ demand for financing is still weak, reflecting the ready availability of own funds and the problems facing certain sectors. if the economy is to continue to strengthen, the global cycle must keep improving, there must be no increase in the volatility of international financial markets, and monetary and credit conditions in the euro area must remain highly expansionary. in early june the governing council of the ecb confirmed its commitment to maintaining a very substantial degree of monetary accommodation. to ensure a sustained convergence of inflation towards the price stability objective, it expects that official interest rates will remain at present levels for an extended period of time, and well past the horizon of the net asset purchases, which will run until at least the end of this year. but to erase the legacy of the most severe economic crisis in our nation ’ s history, the consequences of which can be seen in the record levels of unemployment, the public debt - to - gdp ratio and the ratio of non - performing loans to total outstanding loans, we need more than just a cyclical recovery. in italy economic development is still hampered by the rigidities and inefficiencies of the environment in which firms operate and by weak productivity growth. the process of reform must continue, requiring a collective commitment, far - sightedness and measures to mitigate the costs of the transition. banks, too, must change, seeking to become more resilient and to regain an adequate level of profitability. the success of this transformation depends on the entire economy returning to a path of sustained and enduring growth to which banks must contribute ; at the same time banks must be prepared for the possibility that it may take a long time to achieve a more satisfactory rate of expansion in production. in 2016 and in the first few months of this year both new npl flows and their ratio to total loans fell. this is a trend that should be encouraged through active management of these exposures. to recover profitability, additional decisive steps must be taken to cut costs, re

including those working at the bank of italy, has long highlighted the importance of structural factors that are specific to the italian economy and to their interaction with the three fundamental changes that have taken place since the second half of the 1990s : globalization, the technological revolution and the demographic transition, especially, but not only, linked to population ageing. on top of all this we have had the establishment of the economic and monetary union and the adoption of the euro. to all these changes the italian economy has adjusted very slowly, if at all, and with substantial delay. the result has been the inability to overcome well known structural weaknesses. some of these weaknesses are internal to italian firms, which are, when compared to those located in other developed economies, considerably smaller, older, with a lower propensity to innovate and adopt new advanced technologies. management skills and practices leave much to be desired and are often old - fashioned. to finance their activity firms rely on bank credit much more than what happens in other advanced countries : in this regard, it is well known that this is not the ideal source for financing innovations. the capability of italy ’ s productive economy to increase sales and create value added has been also undermined by long - standing institutional weaknesses. since 2011 italy has undertaken a vast programme of structural reforms, aimed at creating a more growth - friendly environment. legislators have approved, in various steps, measures to reduce red - tape, to simplify bureaucratic procedures for starting and running businesses, to improve the efficiency of the public administration and the judiciary system, to prevent and fight corruption, to stimulate innovation, and to achieve a more flexible and dynamic labour market. the process is still ongoing and far from being concluded, even if in several areas there are first effects. the stock of pending civil proceedings is decreasing : our estimates show that some of the measures adopted in the past to reduce red tape and to simplify business start - up regulations have had positive effects on the entry rate of start - ups. the jobs act is a wide - ranging reform, that has tackled employment protection legislation, unemployment insurance, wage supplementation funds, active labour market policies and other aspects. but while its long - term effectiveness still remains to be seen, we must understand the risks of going backwards, as reducing labour market segmentation is fundamental in the quest to allocate labour from less to more productive uses, and to boost aggregate productivity. factors that negatively impinge on aggregate productivity growth by constraining both efficiency gains