The last thoughts of Ignazio Visco, Governor of the Bank of Italy: “On the Pnrr there is no time to lose”

The high uncertainty globally requires maximum attention to public debt and accounts, which cannot make leaps forward. The governor of the Bank of Italy Ignazio Visco is pragmatic in his last Final considerations as a tenant of Palazzo Koch. “The challenge is demanding,” he explains. This is because the turbulence is numerous. Inflation remains high and “the restrictive tone of monetary policies is confirmed for the moment” aimed at keeping it under control. Italy, he explains, has shown “a remarkable capacity for resistance and reaction”. But from the tax authorities to competition, it is necessary to keep the bar straight on the country’s renewal process. At the same time, on the Pnrr the governor remarks that “there is no time to lose”.

The macro picture

War in Ukraine, geopolitical turmoil, financial instability. The unknowns remain high. In fact, says Visco, “the forecasts for growth of the world economy in the coming months remain uncertain”. A concept, the latter, which is repeated 12 times in the Final Considerations marked 2023. Weighs “the persistence of the conflict in Ukraine; there are doubts about the intensity of the recovery of the Chinese economy, which followed the removal, at the end of last year, of the particularly restrictive measures maintained to combat the pandemic”. With the drop in energy prices, says Visco, “inflation is now decreasing, in Europe as in the United States”. The core component, ie calculated net of energy and foodstuffs,” however remains high and, for the time being, the restrictive tone of monetary policies aimed at keeping the trend in prices under control in the medium term is confirmed. To the effects of the adoption of these policies “in an almost synchronized manner in all the main countries, there can be added, on an international level, risks of instability of the financial system”. The challenge is “demanding”. According to Visco “it is necessary to strike a balance between the risk of an insufficient restriction, which could lead to an entrenchment of the inflationary dynamics in the expectations and processes for determining nominal incomes, and that of a disproportionate tightening, which could have too intense repercussions on the economic activity, and have negative repercussions on financial stability and, ultimately, on price stability itself in the medium term”. The straight bar will be held, but without dogma.

Italy

After the macroeconomic picture, the Italian one. And it can be considered as a positive picture, albeit with numerous vulnerabilities. “Faced with the shocks of unusual intensity in recent years, the Italian economy has shown a remarkable ability to resist and react”, underlines Visco. Who recalls that “already at the end of 2021 the product had recovered from the collapse recorded in the quarters following the outbreak of the pandemic; it then continued to expand last year, despite the difficulties posed by the war in Ukraine, with an increase of 3.7 percent, well above expectations”. Even the labor market, he points out, “has fully reabsorbed the sharp drop in employment, which had mainly concerned young people and women”. Furthermore, “in the first quarter of this year, economic growth once again exceeded expectations”. For 2023, the forecasts available today “converge on an increase in the product of around one per cent”.

Some sectors in particular have driven the economy. “The recovery was more marked in construction, supported by tax incentives for the redevelopment of the building stock, and in services, which returned to significantly expand with the overcoming of the measures to combat the spread of infections”, it is noted. Despite the difficulties during the year, he explains, “manufacturing production also remained on average at the levels of 2019”. The renewed vitality of the economic system was then “manifested in the robust expansion of exports and in the strong recovery of capital accumulation”.

The critical issues of the country

All these indications, the governor points out, “are comforting also in the light of the weaknesses that still afflict our economy and which in recent decades have been reflected in a progressive decline in per capita income compared to other advanced countries”. And then the critical issues begin. “We have discussed it a lot, even here – admits Visco -, noting how the protracted stagnation of labor productivity has contributed both to the low efficiency of production processes and, in the phase following the global financial crisis, to the weakness of the accumulation of capital”. Over the past twenty-five years, output per hour worked has grown “by just 0.3 per cent a year, less than a third of the average for other euro area countries”. The margins of flexibility introduced in the labor market “were not accompanied by technological investments adequate to the new context; the quality of human capital is still insufficient”. And Visco remarks that “neither the profitability of companies nor hourly wages benefited, whose growth net of inflation was among the weakest in Europe”.

The occupation

There is also a reference to the labor market. Which could be more streamlined and inclusive. Especially for young people and women. The atypical forms of contract “have accentuated the response of employment to the cyclical trends of the economy and favored the increase in the number of employed people in many households, albeit with modest wages”. In 2022, with the sustained recovery in labor demand, the transformation of temporary contracts into permanent contracts increased considerably. In many cases, however, “temporary work is associated with very prolonged precarious conditions”. Visco recalls that “the share of young people who are still employed on a fixed-term basis after five years remains close to 20 per cent. Too many, not only among young people, do not have a regular job or, despite having one, adequate contractual conditions are not recognized”. As in the other major countries, this is the governor’s suggestion, “the introduction of a minimum wage, defined with the necessary balance, can respond to the not negligible needs of social justice”.

The problem of the aging of the Italian population, remarked Visco, is real. “Even in the very favorable hypothesis of a progressive rise in the activity rates of young people and women up to the average values ​​of the European Union, economic growth over the next twenty years will not be able to count on an endogenous increase in the labor force”, he explains he. “The effects of the decline in the population in the middle ages can be mitigated in the medium term, as well as by a lengthening of the working age, only by an increase in the migratory balance”, points out the governor. A phenomenon that will have to be managed in the best world.

The reforms and the Pnrr

The governor has ample space for the renewal of the country. Starting with the tax reform. The growth capacity of our economy is weighed down, Visco points out, by “a complex tax system, on which we have often intervened without an organic plan”. And a message to the government immediately arrives: “A recomposition of the levy that reduces the burden of taxation on production factors can stimulate employment and investment. The removal of the measures that negatively affect the dimensional and organizational choices of companies, while preserving those that encourage capitalisation, would help to increase their efficiency”. Changes to personal taxation that pay attention to the redistributive effects “should be modulated taking into account the overall entity and the specific characteristics of the social security programmes”. The rationalization of the rules and the simplification of obligations can “give certainty and stability to the system, containing administrative costs”. No intervention, he explains, “can realistically disregard the constraints posed by our high public debt, nor the principles of progressiveness and ability to pay enshrined in the Constitution”.

The passage on the Recovery fund is also important. “Improvements in the Pnrr are possible,” he concedes. In pursuing any changes, “however, it is necessary to take into account the tight program agreed with the European authorities”. In this regard, “continuous dialogue with the Commission is absolutely necessary, as well as useful and constructive”. This is because “there is no time to lose”. Then the jab and the call for political seriousness: “The alleged inadequacies are discussed in the collective debate regarding its design, the limited time horizon for achieving the objectives, the possible deficiencies in the ability to implement the measures, but it must be strongly emphasized that the Plan represents a rare, and overall valid, attempt to define a strategic vision for the country”. Also for this reason, says Visco, “in addition to investments and other expenditure interventions, it is crucial to implement the ambitious reform programme, which has been awaited for too long, contained in it”.

The public accounts

Again, awareness is needed. “Reducing the size of the public debt is a priority of economic policy, regardless of European rules,” says Visco. A high debt “requires that a large share of public revenues be devoted to interest payments rather than productive uses”. And this “creates serious problems of equity between generations; it makes it more difficult to take counter-cyclical measures; generates uncertainty for economic operators”. The need to refinance it for large amounts every year makes the country “vulnerable to adverse market dynamics, even when the latter do not appear justified by the underlying economic and financial conditions”. Regardless of the causes that brought it to its current levels, Visco underlines, “it is now a priority to give continuity to the consolidation process started in the last two years. To this end, given the physiological, gradual increase in the interest burden, which also reflects the normalization of monetary policy, a return to significant primary surpluses is necessary, such as those planned for the medium term in the latest Economic and Financial Document ”. In other words, we must continue to keep public finances under control. Especially because, says the governor, “maintaining prudent management of public finances is an important sign of credibility; it helps to compress the yields of our government bonds, bringing them closer to those of other large countries in the euro area”. A way to secure Italy also from market turbulence.

Future challenges

Visco’s latest Final Considerations recall the high level of uncertainty that currently surrounds the global economy. But it also provides a positive picture for the country, much better than the forecasts of a few months ago. The problem, both for the government and for the European Central Bank, will be to find an axis of rotation that seems increasingly complicated to identify.