Inflation, because it will drop to 3% (but not below) and the consequences for Italy – Corriere.it

Over the years I have developed a technique for not making mistakes in predictions: don’t make any. Or rather only do them when they seem easy, and even then I often stumble. But I prefer to remember them only when I get it right. Last August 8 in this newsletter, for example, I wrote that inflation would soon start to come down; that the recession “might be less dramatic and less profound” than feared; and that dependence on natural gas from Russia “will be broken” and it was foreseeable that its price would start to fall “at least from the second half of 2023” (actually it has done it earlier).

Heartened by this string of centered predictions, he will try harder than he can. I say that inflation will continue to fall rather rapidly this year but, before reaching the 2% target set by the European Central Bank, the decline will slow down. Almost to a stop.

Having reached around 3%, probably towards the end of the year, the cost of living will refuse to continue sliding easily downwards. We will not automatically go back to the pre-Covid world where prices were basically frozen and rates at zero. as if, after a fever, the temperature dropped to 37.5 but then stayed there. There are many causes behind such an evolution: the relative scarcity of manpower in certain regions and sectors, when those who retire are twice as many young people entering the world of work; public investments much higher than before throughout the West, which will create disputes to find many products (cement, steel or microchips); relocations to less low-cost but closer and more reliable countries; the bottleneck of some channels of global trade, in a world marked by the war in Europe and by the rivalry between China and the United States; finally, the green transition and the scarcity of the raw materials necessary for it: are we sure, for example, that the lithium available today will be enough for all electric batteries? (On these issues I recommend Europe Matters, the newsletter of the excellent James Fontanella-Khan).

So the price fever will probably come down, but it won’t disappear. And the case of wondering what consequences it could have for us Italians. For our public debt, for household savings and investment choices. In this regard, I am among the many impressed by Giorgia Meloni’s recent interview with Sole 24 Ore. “With Minister (Giancarlo, ed) Giorgetti we are working to secure our debt from new financial shocks and attract the confidence of savers and investors, even in the medium term,” said the premier. We want to reduce dependence on foreign creditors by increasing the number of Italians and residents of Italy who hold shares of debt. What did Meloni mean? And why does it all have to do with inflation? I try to disassemble and reassemble the pieces of this story. Given that the ECB is aiming for 2% inflation, it seems likely that it will react to a 3% or 4% price move by holding interest rates higher than it otherwise would have. The central bank has already achieved the fastest rate hike in its history (up 3% since July). Now it could raise at least another 1% by next June and then hang around: at least until inflation really starts to fall towards 2%. All this will slow down the economy more and more and raise the interest cost of the Italian public debt. Especially if Italy returns to growth by a sclerotic 0.9% in 2024 (as predicted by the International Monetary Fund), the increases in state revenues will struggle to keep up with the growing cost of interest on new debt: the one to be placed on investors to finance school, health, defence, justice or pensions.

It must be said that we are not risking a remake of the 2010-2012 dramas. We are more sheltered for at least three reasons: the government is prudent in managing accounts; the ECB today has a panoply of shields to protect countries under attack; and the European Recovery, with its 200 billion, ensures Italy part of the new loans it needs and some more hope for growth. But the situation remains delicate, as Meloni’s words on debt sovereignty reveal: the premier’s idea of ​​making sure that the Italians lend their government the necessary money. What does it mean? At first sight, the exact opposite of what happened in the last quarter of a century, an inversion of the historical trends of disengagement of small savers from public securities. In December 1998, the last month before Italy switched from the lira to the euro, 33.2% of the country’s public debt was in the hands of families (according to data from the Bank of Italy). By May 2010, on the eve of the euro crisis, this share had dropped to 17.4%. On the eve of the pandemic it was 9.5% and in the spring of last year it had dropped to 8% (since then it has risen slightly). Foreign investors are also relatively declining, having gone from having more than 40% of Italy’s public debt on the eve of the euro crisis to less than 27% today.

Two categories have become vital in state funding: Italian banks, which however can no longer increase their exposure because they already have about a quarter of the public debt; and above all the European Central Bank which, with quantitative easing, went from having almost nothing to over a quarter of all Italian state debt. this is where the various pieces – inflation, the ECB’s reaction, Rome’s public finances – fit together. Because the central bank today holds Italian government bonds for 715 billion but, to curb the cost of living, has already decided that it will no longer begin to renew the purchases of a part those that will expire in 2023. It will let private individuals take over, if there are any . Not only. A few days ago, Klaas Knot, president of the Bank of Holland, proposed that the ECB accelerate the exit pace from the summer of those 715 billion of credits to Italy and of trillions of credits to the rest of the governments of the area EUR. And the most intransigent against inflation, like Knot, these days in Frankfurt weigh more than before on the choices. Do you know what this means for Italy? It means a record. This year the government will have to issue new government bonds to private individuals (in addition to the renewals of the old ones that expire) for a value as high as it has never been seen since there was the euro. Partly due to a still high deficit. Partly due to the retreat of the ECB. In the current situation, in 2023 the government will have to find new creditors for around 80 billion euros of new debt. If the ECB then follows Klaas Knot’s advice by accelerating its exit, it will have to find new investors for about 90 billion more new debt.

And if new subsidies are finally added to the bills after March, then before the end of the year the government will have to find new creditors. for about 100 billion more debt. It won’t be a walk. Who buys those government bonds? Meloni told us his idea of ​​him: he would like many of those titles to be bought by Italian families. And here I am unbalanced in the latest forecast because, if the pieces of the puzzle are put together, I see waves of so-called Btp Italia arriving in the coming months. We know them. These are issues reserved for small savers, with slightly higher yields than the norm and increasing if inflation rises. They cost the government more, create more deficits, but they are a way of trying to secure (for now) the debt of a country that is not growing. If this is Meloni’s debt sovereignty, I see nothing wrong or new in it. I’d be more concerned if he also tried to apply some sort of financial repression, pushing for banks, pension funds and perhaps even foreign investors to tie up more and more of their resources in state debt. I would also be concerned if foreign investors get the message that they are not wanted, because we prefer debt sovereignty. But for now everything is smooth, you don’t see this risk. Just one humble request: it is not the Btp Italia that is keeping Italy on its feet but the exporting companies, which have grown ten times more than the rest of the economy in the last quarter of a century. When is the government going to push households or pension funds to put more of their huge savings in those splendid private enterprises (and not just in their own huge public debt)?

If you want to write to me, my email: [email protected]
This article was published in Federico Fubini’s Whatever it Takes newsletter, to subscribe click here.

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