Fabio panetta, governor of Bank of Italy, participated in the 20th Spain-Italy Dialogue Forum, throwing a warning on economic situation ofEurope. From the growing inequality in investments compared to the US, to the issue of public debt, to the proposal to create a “common budget capacity” to support the future of the continent, Panetta has outlined the path to follow. His message is clear: to overcome the crises, Europe can no longer take small steps, but must adopt a courageous and collective plan: “Place the innovation at the heart of economic policies as the driving force of productivity and growth, mobilizing public and private resources for this purpose".
The production gap with the United States
The number one of Via Nazionale, has addressed the issue of European productivity, underlining the growing gap with the US. He noted that the “structural weakness” of the European economy is linked to low productivity growth, due to the poor ability to innovate. “If Italy or Spain were one of the states of the American federation, they would be in the lowest quintile in terms of GDP per capita,” a figure that, although worrying, serves as a push to improve. Panetta also criticized the delay in European investments in research and development, which are only 60% of those in the United States, and highlighted the growing gap in investments in artificial intelligence, with Europe far behind China and the United States. “Remaining on the sidelines of the technological process would be short-sighted,” he concluded, launching a warning on the need for a change of pace: “Innovation must be placed at the center of economic policies” to increase productivity and stimulate growth.
Panetta: “The gap in R&D investments is increasing”
Panetta placed emphasis on the Lack of investment in Europe. According to him, “over the past ten years, productive investments in Europe have been systematically lower than those in the United States; the gap, which in the years before the pandemic seemed to have narrowed, is now widening again.” This, he explained, concerns not only investments in infrastructure but also in “research and development,” which “indicate problems with the quality and composition of spending.”
Panetta continued by referring to the need for huge resources to ensure "sustainable growth and the strategic autonomy of the European economy". In this regard, he cited several analyses which estimate that the double green and digital transition, together with the strengthening of the defense, will require a commitment of “800 billion in additional public or private investments each year until 2030.” This amounts to about 5% of the EU’s GDP per year. However, the Bank of Italy governor stressed that “this amount does not include all the expenses needed to improve innovation capacity, such as those for training skills related to emerging technologies.”
Three key aspects for investments
Panetta then explored three fundamental aspects who must guide the European strategic investmentsThe first concerns the need for projects at European level, since “investments would be too costly for individual Member States, even the most financially sound.” Only joint interventions, he explained, can improve “the functioning of the single market, exploit economies of scale, avoid duplications that would arise with actions at national level and avoid the free riding problems typical of public goods”.
The second point concerns the source of funds: “Interventions of this scale require a joint contribution of both public and private resources.” Panetta recalled that “four fifths of European productive investments have been financed by private individuals, while the remainder has been carried out by the public sector.” However, he added, “it is reasonable to expect an increase in the public share, since many interventions – such as the production of innovative technologies, digital transition, energy security and defense – concern European public goods.”
Finally, the number one of Via Nazionale underlined the importance of “explain with clarity to citizens Europeans that the high costs of investments will be balanced by equally high benefits.” This approach, he added, is essential to “protect the weakest sections of the population, who could be most affected by the changes,” and to “reduce any social and political resistance, strengthening support for the common project.”
The role of public resources and the common European debt
Panetta continued to analyze the economic situation in Europe, speaking about the debt: “On the one hand, some countries have high public debt – a significant problem for the Spanish economy and even more so for Italy. On the other hand, the common European debt is small.” Much of this debt is linked to the Next Generation Ee (NGEU) programme, with “650 billion euros” earmarked for the “Recovery and Resilience Facility.” However, he warned that “the programme will end in 2026,” and that, from 2028, the “stock of common bonds will start to decline, until it becomes almost zero in the following three decades.”
Panetta called for a “common budget capacity to finance public goods,” clarifying that this proposal “does not imply the creation of a fiscal union nor does it require a European finance minister or systematic transfer mechanisms between countries.” The aim is “to establish a common spending program to finance essential investments for all European citizens, creating a productivity compact at the continental level.”
Finally, he exemplified how an investment plan of 800 billion per year, with a quarter financed by common debt, would bring European debt to “6 percent of EU GDP in 2030,” stressing that the increase in liabilities would be “limited and aimed exclusively at increasing the productivity of the European economy.”
Creating a European Capital Market
Another key theme addressed by Panetta was the creation of a European capital market. “One of the biggest obstacles to innovation in Europe is the lack of an efficient and integrated capital market on a continental scale,” he said. According to Panetta, this market should be able to “select the most capable entrepreneurs and support high-risk, high-return projects from their early stages.”
He added that a European capital market requires the collaboration of “intermediaries and private investors” not only for financing, but also to “screen and monitor projects.” He also stressed that “the role of the stock market and other specialized forms of financing, such as private equity and venture capital, will be crucial.”
To build this market, Panetta highlighted two main problems: the first is the lack of a “European risk-free government bond,” which would “facilitate the pricing of financial products” and stimulate market development. The second problem concerns the “incompleteness of the Banking Union,” which forces banks to operate mainly in national markets. “The establishment of the Single Supervisory Mechanism and the Single Resolution Mechanism were important steps forward, but they were not enough to create a fully integrated European banking market.”
Panetta: “Europe will be forged in crises, united action is needed”
Concluding his speech, Panetta quoted Jean Monnet, recalling that “Europe will be forged in crises,” urging member states to seize challenges as opportunities for profound change. Panetta reiterated that “no member state can do it alone” and urged a united action at European level to “strengthen technological sovereignty, create jobs and improve the quality of life of citizens”. In short: “Europe must aim high” to transform difficulties into opportunities for growth and progress, by teaming up.
