What could be further between the environment and public finance? Yet both move around the same hinge: theirs sustainability in view of the next generations.
It is the perspective on which the intervention of Luigi Federico Signorini, general manager of the Bank of Italy, at the inauguration of the Advanced Training Course of the Italian Banking Association.
“Carpent tua poma nepotes”, recalls Signorini quoting Virgil: “The fruits of the trees you plant, your descendants will reap them” and this approach must serve both to address the environmental situation and that of public finances.
Either way, you have to choose between intervene or postpone: “Postponing may seem like an easier choice today” says Signorini, “but it aggravates the tomorrow's problems. Furthermore, on the one hand there is a tendency to give too little weight to the well-being of future generations, while on the other it does they overestimate the difficulties of the present. Finally, underlines Signorini, in both cases rather than taking immediate draconian measures, it is necessary chart the course clearly.
The ecological transition as a source of economic development and general well-being
Whatever your personal preferences in terms of the environment, you need to carefully evaluate the costs and benefits of each action, with one long-term vision, free from prejudices, underlines Signorini, and one cannot ignore appropriate public policies.
The ecological transition, if entrusted to the extent necessary to the creativity and initiative of the market, can, indeed must, be source of development also cheap and of well-being in general: it is the obsessive protection of the old, the rearguard battle in defense of the existing productive structure, which reduces the prospects for employment and income, not the opening to the new.
According to the scenarios elaborated by the network of central banks Ngfs (Network for the greening of the financial system), a timely climate transition and gradual presents considerably lower costs and risks than a delayed and ultimately accelerated transition by the precipitating consequences of uncontrolled global warming
Ecosystems: 29 are at high risk and represent 39% of the national territory
Out of 85 categories of ecosystems, 29 are at high risk and represent 39% of the national surface, underlines Signorini, referring to the Report on the state of natural capital in Italy, drawn up by the Committee for natural capital, in which the Bank of Italy participates. As a result of soil sealing, depletion of fish resources, eutrophication of water, 30% of the sea grasslands. THE italian forests, among the richest in biodiversity in Europe, they are affected more frequently than in the past by fires, extreme weather events and parasitic epidemics.
Il climate change it is one of the main factors of pressure on nature and human well-being, but other causes are added to it: changes in land use, loss of habitat, pollution, spread of invasive species.
The impact of water scarcity on the economy
There may be different sensitivities in dealing with environmental issues, but some aspects of them cannot be ignored. No one will have missed the alarms on the flow rate of Italian rivers that recur and intensify from year to year. According to calculations by the Higher Institute for Environmental Protection and Research (ISPRA), between 1991 and 2020 the water availability decreased by 20 percent compared to historical values.
The effects of these trends range from the yields of agricultural sector, with potential effects on food prices, to the value of winter tourism, To electricity generation. This last point in particular has pervasive consequences on the economic system. In 2022, hydroelectric production, the most important component of energy from renewable sources, was approximately 40% lower than the average for the previous four years.
"Act on the price of energy from fossil sources"
In the case of energy and climate, long-term quantitative objectives have long been established at international and European level. The hard part now isimplement policies to achieve these objectives and above all to persevere over time, even in the face of unpredictable developments. For example, it is necessary to “act on the price of energy from fossil sources, perhaps gradually, but with sufficient clarity regarding the final objectives”, continues Signorini. In some European countries, attempts have been made to help those in need without completely suppressing the allocative effects of relative price signals, while "in Italy In my opinion, the question has not received all the attention it deserved in the public discussion on the measures to be taken”. In the long term, the decarbonisation of the energy system not only does not conflict with the pursuit of strategic security in this area, but rather favors it: it reduces Italy's dependence on specific sources and suppliers; at least partially insulates our economy from the volatility that characterizes the prices of energy commodities.
What role do central banks and supervisory authorities play?
Although the ECB has always recognized that the primary responsibility for environmental policies rests with governments and parliaments, the European central banks, as institutional investors albeit sui generis, in their investment policies take account of environmental sustainability. So does the Bank of Italy, which adopted a Sustainable Investment Charter in 2021 and annually publishes a Report on the matter. “On the subject of actual monetary policy the first contribution that it can make to sustainability is to favor efficiency resource allocation in the desired direction by effectively pursuing its objectives of protecting monetary and financial stability, key conditions for the proper functioning of the markets and the price system".
Climate change brings risks, especially credit risks
Banks and other operators must take into consideration that the evolution of the climate involves risks, in particular credit risks. The Single European Supervisory Mechanism (SSM) published supervisory expectations on climate risk for "significant" banks in 2020, returning to them also subsequently. the Bank of Italy did the same in 2022 for smaller banks and other supervised financial intermediaries. “Risks from biodiversity loss and other environmental degradation processes could also be relevant,” says signiruni
Public debt: the sooner it is reduced, the sooner one can think of broader policies
From the past we have inherited an enormous public debt, the payment of the interests of which reduces the energies of the state on the table of general policies: the more we are able to reduce it, the smaller will be the share of this burden that we will load on the shoulders of future generations. Of course, the debt burden is slowly changing, but adequate final objectives need to be set
The benchmark is theprimary surplus, which can be relatively moderate as long as it is persistent. In any case, it is necessary to exploit, with eyes turned to the future, all the spaces that the economic situation offers, to shun the logic of the "little treasure", to spend thoughtlessly whenever the trend of income or expenditure is a little more favorable than the expected and do not always postpone the start of treatment until better times.
We need to reposition ourselves for when real rates return to "normal"
The Bank of Italy emphasizes the various contemporary contexts, from the unexpected shocks that have hit the global economy since 2020, to the uncertainty linked to the war and international relations trends, but also due to the sudden rise in theinflation. The latter in particular influences public finances through various channels. With the ultra-loose monetary policy of the recent past fading away, it will be necessary to adjust financial programs to a real rate environment.”normal”, moderately positive, such among other things as to reasonably remunerate savers.
Looking ahead to the next few years, some simulations carried out on a horizon up to 2035 may be helpful: assuming that growth in real terms is of the order of one per cent a year and that the average cost of debt grows gradually from current levels to values slightly above 4 per cent, a primary balance even decidedly lower than the levels that our country achieved in the second half of the XNUMXs, provided it is maintained on a constant basis, would be sufficient to achieve a significant reduction in the debt-to-GDP ratio .
The weight of population reduction
In an even more long-term perspective, it will then be necessary to take account of demographic trends. A large part of the challenge of the prospective sustainability of public finances is played out on this terrain and the terms of intergenerational equity can be better understood. The most recent demographic projections by Istat foresee a strong reduction in the resident population - and in particular of that of working age - connected with birth and mortality dynamics and the phenomenon will be compensated only in part by net immigration.
The ratio of individuals returning to working age to the rest of the population would go from about 3:2 in 2021 to about 1:1 in 2050. At the end of last year, the State General Accounting Office revised the projections of public spending connected with the age of the population in the long term: these disbursements, currently at values close to 24 per cent of GDP, would grow to slightly exceed 25 per cent in 2044, a peak which reflects the pension component.
The issue of pensions: they can be reformulated, but with certain criteria
Pension reform has been instrumental in moderating outlays over the very long term, despite an aging population, thereby reducing the otherwise prohibitive burden on future generations.
For the future it is not impossible to introduce elements of flexibility, both forwards and backwards, into retirement age. However, on the subject of early retirement, There are two limits which should not be passed over and carefully studied. The first is that the advance is not such as to reduce the individual pension treatment below a level sufficient to allow the retiree to live a dignified life, face adversity and not unduly burden the community as a result of too short-sighted choices. The according to concerns the distribution of aggregate pension expenditure over time. In the event that, with the introduction of more flexible rules, many decide to anticipate their retirement and few instead of delaying it for a certain number of years, a "hump" in the expenditure trend would arise such as to put at risk the stability of public finances in the short term.
