How do you respond to the slowdown in the Italian economy and to the uncertainties that the constitutional referendum projects on the entire Italian political and economic scene? That's what FIRSTonline asked Paolo Onofri, fine economist of the University of Bologna, founder and general secretary of the economic research company Prometeia and author of his invaluable forecast reports on the Italian economy. Two elements stand out in his thought: the concern for the "destabilizing effects" that a victory of the NO in the referendum would have on the economy and the conviction that a well-combined mix of interventions on investments, consumption, employment and taxation could have on the revival of growth. Here is his interview.
FIRST online – Professor Onofri, did you expect the spring freeze on the Italian economy, with zero GDP growth in the second quarter of the year and sharply lower forecasts for the whole of 2016?
ONOFRI – Yes, we expected it even if the slowdown came mainly in the last part of the second quarter, between May and June, and has nothing to do with Brexit or the uncertainty of other political events, but is instead linked mainly to the deterioration of the world economic situation which ended up depressing our exports as well, which suffer from low systemic competitiveness, which in turn refers to the stagnation of productivity, concentrated in very small companies. Naturally, the facts of domestic and international politics that generate uncertainty may have influenced the expectations of households and businesses but they were not decisive in the situation of the Italian economy in the spring.
FIRST online – The deterioration of the world economy applies to everyone, but other countries and other European partners are growing faster than us: what then are the causes that force the Italian economy to grow little or nothing and in any case less than the economies of other European countries?
ONOFRI – For a country poised between stagnation and micro-recovery like Italy, the effect of international deterioration is stronger. Unfortunately for us, stagnation comes from afar and even predates the global crisis that began in 2007 and 2008 and started in the early 90s. Looking back over the last twenty years, it was only in the mid-XNUMXs that the Italian economy experienced a period of relative prosperity. Then long-term trends emerged – from low productivity to the demographic crisis and the exploits of emerging countries – which, unlike what happened in France and Germany, weighed all together and without any compensatory or counterbalancing elements on the economy Italian, with the results we know.
FIRST online – Until some time ago, Europe reproached us for not carrying out reforms, but in the last two years many reforms have been made, yet the horse does not drink: why? Are the reforms made not enough or will the dividend of the reforms come later?
ONOFRI – The reforms, which must be pursued with energy, can demonstrate the good intentions of the Government to intervene on the structural problems blocking the Italian economy, but their practical effects can only manifest themselves in the medium-long term, even if since 2014 there has been it was a small recovery in employment dynamics that went beyond expectations, thanks to the Jobs Act and the tax relief on businesses and labour.
FIRST online – Prometeia had already lowered its 2016 GDP growth estimate to +0,8% in its forecast report at the beginning of July: is that forecast still valid or should it be further corrected downwards?
ONOFRI – There is a risk of a further reduction in GDP growth in 2016, but the biggest problems will concern 2017, because, if next year begins with a slowing economy, it will be very difficult to achieve growth in '1% that could only be reached in 2018.
FIRST online – In this already uninspiring scenario, how much does the uncertainty linked to the autumn constitutional referendum weigh on the expectations of the Italian economy?
ONOFRI – It weighs a lot because it will be a key step not only for Italy but for the whole of Europe after Brexit and after the imminent elections in Austria and the Netherlands. Our referendum is a crucial element of the European balance and its effects on the economy will be significant, both in the case that the YES wins and, even more so, in the hypothesis that the NO prevails.
FIRST online - Because?
ONOFRI – Because the Italian referendum is part of what we at Prometeia have defined as the "known unknowns", i.e. those events of a political nature known because they were planned and known well in advance but by definition impossible to predict, because their effects, unlike the past, today they represent as many turning points on the institutional level and fundamental crossroads for economic growth with potential systemic risks. The surge in political risk is especially worrying in the most fragile European countries such as Italy and this is why the constitutional referendum will be decisive both politically and economically.
FIRST online – Prometeia is inclined to believe that the YES will win in the constitutional referendum but warns that otherwise "the repercussions on economic policy could be destabilizing": where do these assessments come from?
ONOFRI – We are betting on YES not on the basis of public opinion polls or even on any political analysis but because we believe that awareness of the risks of a rejection of the constitutional reform will be strengthened in the referendum campaign and this will increase participation in the vote by strengthening the stabilizing drive and favoring the affirmation of YES. If the opposite were to happen instead, you don't need to be a refined political scientist to understand the negative effects on political stability and the consequent destabilizing effects on economic policy.
FIRST online – With an eye to the political uncertainties hanging over Italy, what should be, in your opinion, the priorities of an economic policy that really aims to relaunch Italian growth?
ONOFRI – All interventions that strengthen demand both through direct support for public investment and through measures that facilitate private investment, consumption and the consolidation of employment through the continuation of tax relief on businesses and labour. It would also be important to review and reduce subsidies to companies and the jungle of tax deductions, but it does not seem easy to implement in the short term.
FIRST online – Is there room, in the current public finance conditions, for some tax cuts, in addition to the reduction in IRES promised by the Government for next year?
ONOFRI – It depends on the margins of flexibility that Europe will grant us. Realistically, I do not see the conditions for a generalized reduction in personal income tax rates which would have high costs, but targeted tax reductions, especially for workers and lower-income retirees, must certainly be placed on the government's agenda, despite knowing that the road is tight, that the uncertainties are many and that the claims are endless.
FIRST online – Professor Onofri, at the time of the Prodi governments, you saw the functioning of the political and institutional machine from the inside, but with the referendum at the door, is it realistic to think of a breakthrough Stability Law?
ONOFRI – It would be illusory to believe that the referendum does not affect the gestation of the Stability Law but I would be satisfied with an economic maneuver which, even without impossible flights of fancy, consolidates the recovery by combining together measures to support public and private investments, consumption, tax relief on work and tax reductions for the less well-off and prepare the ground, referendum permitting, to relaunch the policy of reforms also in the last part of this legislature.
