Here are the essential points of the final remarks given this morning by Mario Draghi, outgoing governor of the Bank of Italy, at the meeting in via Nazionale. For the Governor it was the sixth and last report at Palazzo Koch. At the meeting of European heads of state and government on 24-25 June, Draghi will be designated the new president of the ECB, where he will succeed Jean Claude Trichet at the end of October.
– “The country is silted up, but not in decline. We need to grow again. The descent is not inevitable, delays can be addressed".
"Already in my first public speech as governor, in March 2006, I noted how the Italian economy appeared to be stuck, but that its structural delays were not to be understood as signs of an inevitable decline: they could be tackled, clearly reporting them to the community , even when the solutions are adverse to the immediate interests of segments of society. A few weeks later I addressed you here with the opening words 'Returning to Growth'”.
– “The maneuver in June was good. But we need to cut taxes on workers and businesses”.
“The goal of balancing the budget in 2014 and the intention to bring forward to June the definition of the corrective maneuver for 2013-14 are appropriate. The high tax rates on workers' and businesses' incomes should be significantly reduced, offsetting the lower revenue with further tax evasion recoveries, in addition to the truly appreciable ones that the tax administration has recently achieved”.
– “Reduce spending by 5%, but nothing in linear cuts: they would cost 2 points of GDP in 3 years”.
“The effort required of us is less than in many other advanced countries. Without sacrificing capital account expenditure beyond what is already foreseen in the trend scenario and without increasing revenues, current primary expenditure will still have to contract, however, by more than 5% in real terms in the three-year period 2012-14, returning, in relation to GDP, on the level of the beginning of the last decade. It is not advisable to make uniform cuts across all items. Such a maneuver would affect the already weak recovery of the economy, up to subtracting it by about 2 points of GDP in three years”.
– “Productivity is stagnating: wages and consumption are at a standstill”.
“The production system loses competitiveness. Growing deficits open in the current balance of payments. The inflow of direct investments dries up: in the decade capital for direct investments entered Italy equal to 11% of GDP, against 27% in France. The wage dynamics are modest for us, not being able to deviate too much from those of productivity: domestic demand suffers as a result. The real wages of employees in our country have remained practically unchanged over the decade, against a 9% increase in France. Real household consumption, which grew by 18% in France, increased by less than 5% in Italy, and only due to an erosion of the propensity to save”.
– “More company bargaining”.
“Industrial relations must favor the modernization and competitiveness of the production system, in the interest of all parties. Steps have been taken to strengthen the role of company bargaining, but the prevalence of national bargaining, the absence of certain rules in trade union representation, still limit the possibility for workers to make commitments towards the company they belong to; diminish its ability to affect their income and employment prospects”.
– “Companies too small”.
“Italian companies are on average 40% smaller than those in the euro area. The top 50 European companies by turnover include 15 German, 11 French and only 4 Italian. The typical flexibility of small businesses is no longer enough, we need a greater number of medium and large businesses”.
– The capitalization of banks.
“Since last year, the Bank of Italy has asked banks to strengthen capital. The response from shareholders, foundations and investors was prompt. Between October 2010 and April of this year, capital increases amounting to over 11 billion were launched”. It is not true that the strengthening of banks' capital involves more costs and less growth.
– Popular banks and foundations.
The Governor has once again proposed the reform of listed cooperative banks for greater control of directors and greater involvement of shareholders in meetings, including through proxies. “Legislative intervention is necessary; the statutory changes, which we have also requested, cannot be decisive". Draghi then added that "the quality of the governance and control structures of the Foundations, the safeguards of independence and the prevention of conflicts of interest, the efficiency and transparency of financial management are crucial for reconciling their presence in the capital of the banks with their managerial autonomy”.
– “Vast pocket of precarious young people, work needs to be rebalanced”.
“The diffusion of fixed-term and part-term employment contracts over the last fifteen years has contributed to raising the employment rate, but at the cost of introducing a pronounced dualism into the market: on the one hand, workers with permanent contracts, who are better protected; on the other hand, a vast pocket of precarious work, above all for young people, with scarce protections and salaries. Rebalancing the flexibility of the labor market today almost entirely concentrated in entry methods would improve the life aspirations of young people; it would spur the production units to invest more in the training of human resources, to include them in production processes, to give them career prospects".
– Reforms strengthen politics.
The Governor emphasized the need to carry out the most important reforms, starting with civil justice ("The estimated duration of ordinary trials in the first instance exceeds a thousand days and places Italy in 157th place out of 183 countries in the rankings of World Bank”), from education, from the development of competition in public utility services, in the endowment of infrastructures.
– “The Firm Tradition of Supervision”.
“For good supervision it is not enough that the rules are adequate: without strong operating practices, without close and effective action, crises cannot be avoided. The experience of dramatic times has brought him into full light. With the supervision of the Bank of Italy, our country has been able to count on a solid tradition. We have strengthened the most valid aspects of it; the principles of rigorous supervision, which has never been convinced of the 'light touch'; ready to persuade if possible, to prescribe if necessary, within the limits of the law. Made up of trained and upright civil servants”.
– “Growth was the dot of my mandate, so many useless sermons”.
“It is not a new problem, but I claim the merit of the Bank of Italy for putting it first in its economic policy priorities. What country will we leave to our children? Many times we have indicated objectives, lines of action, areas of intervention. Five years later, when one looks at how little of all this has been translated into reality, the futility of the sermons of one of my much more illustrious predecessors comes to mind” (Luigi Einaudi, ed).
– “The ECB will continue on the line of price stability, without deflections”.
“The ECB has the task of ensuring price stability in the medium term; monetary stability is its fundamental contribution to growth. Future monetary policy decisions will always be guided by this primary objective. Neither the presence of sovereign risks, nor the pathological dependence of some banks on ECB financing can deflect this objective”.
– “The Eurozone at its toughest test, there are no shortcuts”.
“The answer to the debt crisis lies above all in national policies, in the full implementation of the agreed corrective plans”. The debt crisis in Greece, Ireland and Portugal represents only 6% of the area's GDP, yet it has "the potential to exert significant systemic effects". But at the same time “in the euro area as a whole the budget deficit this year should be around 4,5 per cent of GDP, less than half that of the United States and Japan; the public debt, at 88 per cent of GDP, is also lower than the US one and far from Japanese values; the current balance of payments is almost in balance. The economic recovery is consolidating, with growth forecast for this year not far from 2 percent”.
– “The recovery of advanced countries is not enough to reduce unemployment”.
“Public budgets need to be brought under control. A prolonged expansionary policy undermines debt sustainability, harms economic growth. In Europe the rebalancing has begun. It could not be postponed, despite the weakness of the recovery”. And at the same time, said the owner of Via Nazionale, we need to proceed to reduce the international financial imbalances. “They are meant to last and will need to be funded. It is therefore crucial that the financial system is sound. Regulatory reform remains a priority on the international agenda; must be completed". Meanwhile, with "the risk of inflation on the rise, monetary policies must now begin a downward trend to prevent inflationary expectations from forming".
– “The large global systemic banks must be able to fail”.
From the belief that these SIFIs cannot fail "there are serious distortions of competition but above all the unacceptable fact that the gains go to individuals, the losses to the community". Supervision of these institutions “should be more intense, commensurate with the risks they can generate. This requires, in many countries, a decisive strengthening of the powers and independence of the authorities".
– "Bankitalia forge of the country, preserve independence".
“Merit and independence: these are the essential conditions for the credibility of your analyzes and for the efficacy of your action. Values to be preserved if the country is to continue to benefit from an authoritative voice without partisan interests. They have been the guiding principles of my mandate”. Draghi did not spare his praise for the via Nazionale leadership, arguing that the wealth of expertise and independence have allowed the central bank to achieve the change objectives indicated at the beginning of his mandate. Now "the path of change will have to be continued with determination, with an innovative spirit". And the team of personnel "is our wealth".
To read the full text of the Governor's Final Remarks:
http://www.bancaditalia.it/interventi/integov/2011/cf_10/cf10
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