Dear Italy, don't delude yourself. The knot of debt, aided by the rise in interest rates, is about to come home to roost. And quick and effective choices are being made under the banner of strategies that, for now, are not seen, on the right as on the left. Except dragging the country towards a new industrial decline. Mario Noera, professor at Bocconi in Finance and Banking, a life as a consultant of the major groups of the Bel Paese, does not give anyone discounts, on the right as on the left, in view of a season that promises to be full of pitfalls. Also because electoral tactics prevail instead of the necessary strategic vision. And so, between Stability Pact and Mes, you risk a bad awakening.
Professor Noera, it looks like a photocopied cry of alarm. A year ago, on the eve of the elections, nobody would have bet on the drop in the spread, the growth of Piazza Affari and a more dynamic GDP than France and Germany. Would you have bet on it?
“No, prudence prevailed at the time. The most widespread impression was that a general yielding was in sight which did not occur also because new phenomena have emerged”.
Which?
“Over time, some elements favorable to the recovery of energy prices have been recreated that were not possible to see before. In particular, profit-friendly situations have arisen that have not been seen for ten or twenty years. The market conditions after the surge following the outbreak of the war allowed for price adjustments and margin defense. And this technically has somehow favored the recovery of profits even more than the margins themselves. A phenomenon underestimated at first but which allowed the stock market to rise, despite the simultaneous increase in interest rates”.
A virtuous phenomenon. Or not?
“If prices rise in the same proportion as margins, the share going to profits remains constant. Otherwise, if, with the same turnover, prices rise more than costs, then firms' profits increase. Last year there was a strong shock on energy prices which initially compressed margins only to then favor a strong recovery which generated a more than proportional final price adjustment: energy started to drop, profits much less. And this is one of the elements that supports inflation and makes it more sticky: the price of energy has fallen, prices much less, while profits have increased”.
So are those who accuse profits as the cause of inflation right?
“In part yes, but the phenomenon is complex with strong differences between Europe and the USA. Overseas wage tensions matter more in a context of excess demand far greater than what occurs in Europe. Here we are faced with very different market conditions.”
In what sense?
“I believe that the process of decomposing the value chains has recreated conditions of local monopoly that weren't there before. The sanctions as well as the unraveling of supply networks have created pockets of monopoly which favor local networks, those less exposed to international competition. It is undoubtedly one of the reasons that explains the persistence of inflation.
In short, the increase in prices can also be explained by the globalization crisis.
“Together with the consequences that we have been dragging on since the times of the pandemic. By now the phenomenon is also structural due to the stiffening of the positions of the superpowers. We live in a phase in which the increase in prices is difficult to fight because the supply structure is more rigid and this makes it more difficult to fight against inflation which does not depend, as far as Europe is concerned, only on the control of request".
There is, therefore, a European syndrome. But how does the Italian case fit into this framework?
“Italy runs the risk of being the weak link in the system, given the fragility of its production system, very positioned on the supply of semi-finished products. From mechanics to chemicals, a large part of industry suffers from the ability to impose the final prices of our suppliers. Energy, utilities and finance have benefited from the situation in recent months. But I'm not surprised that a large segment of the manufacturing sector suffers because it is unable to pass on the higher costs to final prices.
A judgment that is in contradiction with the successes of Made in Italy, more resistant than its European rivals. Why this pessimism to the bitter end?
"For charity. The Italian system has shown great flexibility and adaptation. But let's not delude ourselves: in the face of such a strong and prolonged monetary tightening over time, the margins of recovery erode quickly. It is possible that the cycle is running out”.
Or?
“The slowdown could be much more substantial if the unresolved issues come to a head. The cooling of production can anticipate a setback much higher than the zero point we are talking about”.
Isn't the recession averted, then?
“I'm not at all convinced we got away with it. In Europe we have to deal with the distorting effects on the value chain in a new framework in which the very expansive policies characterized by the almost zero cost of money have failed. And so debt problems will soon be topical again”.
Problems we know well.
“But what we don't know are the new rules of engagement. The modalities of the new stability pact, in particular. All in a climate of growing tension in view of the elections. The economic slowdown is combined with an uncooperative political environment”.
What are we risking?
“European governance reform is an open kitchen. It deserves to be worked on very carefully without neglecting the details of the work of the various chefs which are never simple details".
Including the Mes, so indigestible in government?
“The Mes is undoubtedly one of the ingredients of general financial management. In Italy, it is talked about, wrongly, only for the political repercussions on its image. On the contrary, the issue is substantial: once the low interest rate policy has disappeared, debt problems return to priority. But to really address the problem, it is a question of developing a strategic vision of the country that could involve the government and the opposition".
How?
“At the time, for example, the idea was put forward of using the Mes to take over part of the debt accumulated from the public debt of the various countries. The Mes could have been the tool to prevent the debt crisis, not to intervene afterwards. But this solution, set aside with zero interest rates, is no longer talked about: the debate focuses only on whether or not to ratify the mechanism but not on its overall mission".
And so ...
“So the debate is all tactical. Italy is in an ambiguous position with the clear objective of overturning the political axis of the Community in view of the elections. This lacks a strategic vision. But even the opposition on the Mes and the stability pact does not reflect a strategic perspective. We limit ourselves to short-term evaluations in a flag logic. And so the vital choices for our future fade into the background: the establishment of a sovereign wealth fund to finance investments. Or, another proposition, to spin off everything that is funded by net spending. We must be very clear that we must finance growth and debt repayment in parallel".
Vaste programme, as General De Gaulle would say.
“If the pact does not include an instrument to finance the recovery, I believe it will be very difficult to get out of the debt gripper in these years of high interest rates. We don't just look at accounting data. A great race is underway in the world to reposition itself on new products and new technologies. The US has launched with theWrath a formidable engine to restart their leadership, the European Union has responded with the Green Deal intended to invest all production chains. A planetary race that involves China, the Far East and India through capital investments and training”.
It's Italy?
“If we want to be part of the process we have to invest in that great industrial project which is the l Green Deal. If we can't keep up we are bound to focus on losing sectors. And so slide down. Hence the need to rely on a European fund. In addition to demonstrating, of course, that he knows how to spend the funds of the Pnrr ".
It's not that the EU partners are giving us much help.
“Unfortunately, Europe is going through a delicate moment, dominated by the war emergency. Germany is dismantling the cornerstones of her leadership, from cheap energy to export difficulties. But the positioning of the Italian government does not help”.
And the opposition is lagging…”
“I am very disappointed, Many occasions could be found to raise the tone of the debate. In particular, the opposition should defend from sovereignty what Europe has been able to do so far. But they struggle: yet the European Green Deal was a complete political platform to be fully supported. An inclusive vision of the world, with an eye to the new generations. On the contrary, it has been reduced to a series of green measures presented as sacrifices for the voters, to the full advantage of populist rhetoric. And so when we go to vote in a year's time, the agenda will be adopted by the enemies and the European parties will be forced to play the back game to explain that it is not a question of a cost, but of an investment. There's a big difference."
