The recovery of the Italian economy has now begun and will strengthen in the coming quarters, but the government still needs to speed up the reforms. This is the main message launched by the president of the Bank of Italy, Ignazio Visco, in the final remarks at the annual meeting.
“The recovery that began in our country in the first quarter of this year – said Visco – should consolidate in the current and next quarters. The increase in GDP in the first quarter interrupts a long unfavorable cyclical phase; would continue in the current and subsequent quarters".
ITALIAN ECONOMY: CONSOLIDATE THE RECOVERY
According to the governor, “a reform action has been launched to remove the obstacles to the country's development, recognized internationally by institutions and markets. In order not to disappoint the expectations of change, it is necessary to broaden its spectrum and accelerate its implementation. In some cases the benefits are not immediate but this is one more reason to act, pursuing an organic and coherent plan".
As regards the state accounts, Visco believes that "thanks also to the reforms of the public pension system, in Italy more than in other European countries the long-term sustainability of public finances can be guaranteed".
POSITIVE SIGNS FOR EMPLOYMENT, MORE STABLE WORK
“The strong expansion of permanent hirings in the first few months of 2015 – added Visco –, also favored by the substantial tax relief in force since January, is a positive sign; suggests that with the consolidation of the recovery, employment will be able to grow and move towards more stable forms. Recent labor market reform measures have extended the income support mechanisms for the unemployed and reduced, for new contracts, the disincentive to permanent hiring associated with the uncertainty about the outcome of the termination of employment relationships. A complete evaluation of the effects of these measures is premature”.
RISK THAT THE RECOVERY WILL NOT CREATE EMPLOYMENT AS IN THE PAST
The number one of Via Nazionale underlined that “there is a risk, particularly accentuated in the South, that the recovery will not be able to generate employment to the same extent as it happened in the past after unfavorable economic phases. The demand for labor from the most innovative companies may not be enough to reabsorb unemployment in the short term. The very sustainability of the recovery would suffer, which would not find sufficient nourishment in domestic spending".
ITALIAN COMPANIES VERY LADDER ON INNOVATION
The Governor also believes that “innovative activity in Italy is less intense than in the other major advanced countries, especially in the private sector. The latest European innovation survey indicates that the lag, particularly wide compared to Germany, is accentuated in the industrial sectors with a higher technological content. For Italian companies, the ability to carry out research and development activities internally and to collaborate with universities and other higher education institutions is much lower".
BANKS: ECB EXAMINATION SHOWS SOLITY, NO TO CREDIT RESTRICTION
As for the banks, Visco remarked that the asset quality review initiated by the ECB on the accounts of the main European groups "confirmed the ability of the Italian banking system as a whole to withstand extreme shocks, although it did not benefit from significant public support during the crisis. With the single European supervision headed by the ECB, the criteria with which the banks' capital objectives will be set in the future are now being defined. The primary need to guarantee the solidity of the individual institutions will have to be satisfied without attenuating, in this phase of still uncertain recovery, the overall capacity to disburse credit to the economy”.
URGENT TRANSPOSITION OF THE EU DIRECTIVE ON BANKING CRISIS
The Governor then went back to asking that the Italian Parliament transpose the EU directive on the management of banking crises: "It is urgent to take action: not only to avoid being put in default by the European institutions, but also because the transposition is necessary to guarantee the legal certainty and allow the authorities to exercise the new tasks that the European legislator has assigned them". The deadline for implementation expired at the end of 2014 and from 2016 January XNUMX the European mechanisms for bank bailouts must also be introduced into the Italian legal system.
AHEAD ON COMPARISON WITH EU FOR THE BAD BANK
Visco therefore asked for the creation of a public bad bank to be done quickly, which will make it possible to tackle the problem of bank non-performing loans: "The development of a secondary market for non-performing loans, which is almost non-existent today, would help to fully reactivate the financing of households and businesses. We have been proposing initiatives in this direction for some time, also with the help of the public sector. We are collaborating with the government to design them in compliance with the European rules on state aid. A discussion is underway on the subject with the European authorities, which we hope will be rapid and constructive".
EUROZONE: RECOVERY ACCELERATES…
Extending his gaze to the entire Eurozone, the Governor said that economic growth is strengthening and will continue to do so again next year “largely thanks to the support of monetary policy. However, there are still external risks of a less solid recovery and, in general, monetary policy alone cannot guarantee lasting and high growth. A reasonable use of the existing margins of flexibility is needed and the Investment Plan for Europe must be rapidly implemented”.
…BUT INVESTMENTS NEED TO BE INCREASED
According to Visco, an autonomous financing capacity of the euro area would be needed, which “could be achieved with the establishment of mechanisms for the automatic stabilization of the economic cycle, a first step towards a real budgetary union. Furthermore, in the medium term, the creation of new income, new demand and new opportunities will have to be supported by interventions and reforms aimed at raising productivity and growth potential. It will be necessary to invest in infrastructure, education and training to intervene to increase the efficiency of the labor market and contain the effects on individual workers in the transition phase”.
QE WOULD BE MORE CONSISTENT WITH FULL RISK SHARING
In terms of quantitative easing, the incomplete sharing of risks between countries in terms of government bond purchases by the ECB “reflects the delays and limits of the European unification process – Visco continued -. Full risk sharing would have been more in keeping with the single monetary policy framework and consistent with the Treaty”. In general, QE must be carried out with "determination", said the governor, warning of the risks of incomplete implementation, which would have "very high costs".
SERIOUS CONSEQUENCES WITHOUT FULL IMPLEMENTATION OF THE QE
Fears of deflation have subsided, “but the positive effects of the program observed so far must not weaken the determination to carry it forward but rather a confirmation of the need to bring it to completion. Improvements depend on the credibility of this commitment: the cost of incomplete implementation would be very high. Moreover, to date there are no signs that low interest rates are causing the emergence of generalized imbalances. Instead, if we hadn't started buying securities, we would have faced much greater risks. The main threat to financial stability in the euro area stemmed from prospects of stagnating production and low inflation”.
GREECE: THE RISK OF CONTAGION HAS BEEN CONTAINED
Finally, as regards Greece, Visco underlined that the "difficulties" in defining the necessary reforms, together with the uncertainty "on the outcome of the prolonged negotiations with the European institutions and with the International Monetary Fund, fuel serious tensions, potentially destabilizing. However, the worsening of the Greek crisis has had hitherto limited repercussions on sovereign risk premiums in the rest of the area, reflecting the reforms launched in many countries, the progress achieved in European governance and in the tools available to the authorities to avoid contagion phenomena " .
