°°°°The text published below is a policy brief of the Luiss School of European Political Economy elaborated by economists CARLO BASTASIN, LORENZO BINI SMAGHI, MARCELLO MESSORI, STEFANO MICOSSI, PIER CARLO PADOAN, FRANCO PASSACANTANDO AND GIANNI TONIOLO
Before our eyes prepares an unprecedented crisis. The damage caused to the economic vitality of people and businesses is adding to the losses and human suffering caused by the Covid-19 epidemic. Even the consequences on the economy, such as those on health, are beyond our ability to reliably predict developments in the coming months. The "consensus" forecast on the fall in GDP, currently at 5% in 2020, it would require the economy to start recovering from the end of May to consolidate thereafter. This is an optimistic hypothesis. Other estimates place the fall of the Italian GDP well over 10%.
In this context, the task of the State is first of all to strengthen the health facilities, guarantee the functioning of essential activities and provide immediate and general insurance of incomes, jobs and the survival of businesses for as long as necessary . Compared to current estimates, the State will have to immediately mobilize three or four times more resources. In addition, he will have to exercise great judgment to intervene in order to prepare for the recovery after the fall. It is very important that all the measures are placed in a broader perspective than today, looking for the space to support investments for the productions that in the future will be the engine of the recovery of the Italian economy according to new models of sustainable and efficient development.
The Italian government reacted to the crisis with a first decree (the 18/2020 "Cura Italia") which contains important measures to support the employment and income of all those directly affected by the crisis, as well as to help businesses survive in difficulty. But the extent of the financial commitment is insufficient. Comparison with similar initiatives undertaken in other countries seems to confirm this. Some concern also concerns the effectiveness of the promised interventions, who must be able to reach families, workers and businesses quickly, without encountering obstacles in complicated access conditions or procedures.
The new guarantees provided by the 'Cura Italia' decree leave outstanding loans and new finance for all businesses were largely uncovered, while the expected increase in the Central Guarantee Fund for small-medium enterprises (SMEs) is completely insufficient. Even before the crisis, Italy was characterized by an amount of public guarantees for credit to SMEs much lower than that of the other major countries: to be clear, 4,2% of GDP in our country compared to 10-15% in Germany .
In the current crisis, these guarantees play a crucial role not only in maintaining liquidity support for all businesses and VAT numbers; but also to ensure the flow of resources made available by the ECB at largely negative rates. Without guarantees, banks will be forced to reduce credit as increasing risks tighten capital constraints. It is therefore urgent to double the allocation of the Central Guarantee Fund and rapidly bring the state-guaranteed percentage of business credit to 90%. The cost to public finances – estimated at between half a point and one percentage point of GDP – is certainly worth the candle: here is the issue of the ability to keep hundreds of thousands of businesses alive which absolutely must not collapse because this would cause permanent damage to our capacity productive. A further intervention to be improved is the suspension of tax and social security obligations, today subject to incomprehensible size limits of companies.
Finally, the 'Cura Italia' decree postpones the measures to relaunch growth to further measures. It is necessary for the first decree to be promptly completed, as already anticipated by the Minister of the Economy, by a second and more decisive legislative intervention aimed at longer-term challenges. In this regard, we would like to underline some principles that should be taken into account.
First, support to the economy should include investments that foster business transformation in such a way as to both mitigate the present inconveniences and to facilitate future recovery, in particular if the health emergency were to last until the adoption of vaccines or the mitigation of the contagion. Second, the sectors to be safeguarded must be identified with greater precision and transparency, starting with those relating to the development of healthcare facilities or the digitization of distribution networks, and evaluating their future development: for example, the creation of hospitality and healthcare facilities in the South, or the technological and digital development of activities throughout the country.
In this case, procedures must be adopted that allow for a drastic reduction in the implementation times of capital expenditure. More generally, it is necessary to take advantage of the systemic nature of the current crisis to anticipate the inevitable transformations required both by the new digital technologies and by the challenges posed by sustainable growth, which today more than ever must include the health dimension. One way to do this is to support investment in innovation. Finally, it is necessary to start designing social insurance systems adapted to the new conditions of the economy.
The overall size of the interventions needed now is probably in the order of 5-10 points of GDP, depending on what the size of the shock will be. It should be underlined that the announced purchase of public securities by the European Central Bank is such as to amply compensate for this greater deficit, therefore it can be counted that there will be no problems in placing the securities necessary to cover the greater requirement.
Overall, central banks have created unprecedented liquidity and it is vital that Italian banks and businesses equip themselves to direct it to the real economy. However, this does not exclude the need to use all European financial support channels – from the EIF, to the European Financial Stability Mechanism, to the European Investment Bank. European support is also important to strengthen the credibility of the public guarantees that the Italian government is called to offer in this difficult circumstance. The government should also examine any way to strengthen the direct contribution of Italian savings to support expenses to face the crisis and large investments for the future - for example by evaluating the feasibility of an ad hoc bond loan, as has already been proposed.
In this context, the possibility of Italy using an 'augmented' precautionary credit line must be taken into consideration, offered by the European Stability Mechanism (ESM) – which could go up to 2 percentage points of GDP. With two considerations: the expiry of the Mes credit appears too short; and, above all, the economic policy conditions for the loan should be limited to the good use of resources to deal with the health emergency. Among other things, recourse to the loan would pave the way for the possibility of unlimited intervention by the ECB in case of need.
Just when a challenge seems insurmountable, one must have the ability to look beyond. It is necessary to imagine how the Italian economy can come out transformed by this test. We are understanding the need to have adequate research and healthcare facilities, but we are also experiencing the importance of an adequate level of digitization of activities throughout the country which makes the system of distribution networks for goods and services more efficient of services.
We have also been aware of the need for environmental reconversion of production activities and infrastructures for some time. The available financial resources, partly coming from the European Union, must be directed immediately towards useful projects for today and tomorrow. By supporting families, workers and businesses without savings, facilitating the rapid recovery of the Italian economy and investing for the future, citizens will be offered a prospect of recovering their working life around which to rebuild confidence in our future.
