A year ago, Italy was running. Today, due to the war in Ukraine, it slows down. And the goal is to avoid a recession. The Bank of Italy’s Final Considerations reflect the extreme uncertainty that the conflict initiated by Vladimir Putin has brought to the international stage. Inflation is worrying, as is the deterioration of economic expansion. The fundamentals of Italy remain good, explains Governor Ignazio Visco, but they are susceptible to the negative externalities of the war shock. It is possible to resist, with the National Recovery and Resilience Plan (Pnrr), structural reforms and more Europe.
After a year, 2021, in which the growth estimates of the Gross Domestic Product (GDP) were constantly revised upwards, 2022 records a sharp slowdown, with the expansion that could be below 3 per cent on an annual basis. The governor Visco points out that the invasion of Ukraine by Russia at the end of February marked “a dramatic break in recent history”. It triggered, he points out, “a serious humanitarian crisis and re-emerged tensions between the various areas of the world which in the last thirty years seemed to have been, if not completely overcome, permanently reduced”. The conflict “suddenly worsened the growth prospects of the world economy, at a stage in which the damage inflicted by the pandemic is not yet fully repaired”. Uncertainty has “dramatically increased globally”, and there are intense changes. The difficult to read picture, Visco warns, “affects the pillars on which the international economic and financial structure that emerged from the end of the Cold War is based: peaceful coexistence between nations, market integration, multilateral cooperation”. Globalization in danger poses questions that will have to find quick answers.
The repercussions of the conflict are vast. What is worrying, as also mentioned during the meetings of the World Economic Forum in Davos, is the food crisis. “Although Russia accounts for only 2 per cent in world trade – underlines Visco -, it is among the main exporters of oil and gas as well as fertilizers and, together with Ukraine, of cereals. According to market prices, the prices of these products would remain very high in 2022, decreasing only slightly over the next two years “. Therefore, “the increases in the prices of agri-food products and the difficulties in their supply risk affecting above all the most vulnerable strata of the world population and the countries most dependent on their imports”. The priority is the mitigation of negative effects. The governor explains that “the increase in the prices of imported raw materials is an unavoidable tax for the country”. Public action can “redistribute the effects between families, factors of production, present and future generations”. However, Visco points out, “it cannot cancel the overall impact”.
As regards the families, “Interventions calibrated according to their overall economic condition rather than individual incomes are more effective in countering the repercussions of inflation on inequality”. Furthermore, targeted measures make it possible “to better preserve the role of prices as an incentive for investments in renewable sources and energy saving”. All net of an ecological and energy transition that will have to be accelerated.
Il economic picture it has “substantially changed in recent months”. The action of the ECB will be important. Having averted the risk of deflation, which had required the introduction of unconventional monetary policy measures, and overcome the impact of the pandemic on final demand, “there are no more preclusions to abandoning the policy of negative official rates”, says Visco . The rate hike, which the Governing Council of the ECB “may decide to launch in the summer”, will have to proceed “taking into account the uncertain evolution of economic prospects”. Financing conditions for households and businesses “will remain favorable”. And, according to current market prices, “in the euro area in real terms, short-term interest rates will remain negative for several more years”. The flexibility of monetary policy “was crucial in countering the tensions on the financial markets”. And it remains “a key element of our strategy in the event that malfunctions in the monetary transmission mechanism risk jeopardizing the pursuit of price stability”. To cope with rapidly evolving needs, Visco underlines, “particular attention must be paid to ensuring that the normalization process of monetary policy takes place in an orderly manner and to avoiding the emergence of market fragmentation phenomena that are not justified by economic fundamentals”.
Speaking of inherent strength, the spread run is not seen as a source of concern in the short term. The yield differential between Italian and German government bonds in recent weeks has steadily passed 200 basis points. But, according to Visco, “this sharp increase does not reflect sudden changes in the underlying conditions of the economy: the net position on foreign markets is robust, Italian producers compete successfully on end markets, and the indebtedness of the households and businesses “. However, the increase draws attention to the structural fragility represented by the high level of public debt; confirms the need to continue without uncertainty on the path of gradual strengthening of public accounts “. Fiscal consolidation, therefore, will not be slowed down.
The presence of the Eurosystem is a source of relief, but the macroeconomic scenario could also worsen. The Italian economy is, along with the German one, “among the most affected by the increase in the price of gas, due to the high share of imports from Russia and the importance of the manufacturing industry, which makes extensive use of it”. In January, “output was expected to return to the level prior to the outbreak of the pandemic around the middle of this year” and “a solid expansion, exceeding 3 per cent on average, in the two-year period 2022-23” was envisaged. There guerra however, it «radically accentuated the uncertainty about these prospects. Production activity weakened in the first quarter, also affected by the resumption of infections; it should strengthen moderately in the current one “. In April Bank of Italy estimated that “the prolongation of the conflict in Ukraine could have resulted in about two percentage points less growth, overall, for this year and next”. The most recent estimates from major international organizations are similar. “However, more adverse developments cannot be ruled out – warns Governor Visco -. If the war were to lead to an interruption in gas supplies from Russia, the product could fall in the two-year average ”. The countermeasures in the event of a more marked slowdown, also due to the still uncertain evolution of the Covid-19 pandemic, will be sudden.
The answer, according to Visco, travels along three lines. Pnrr, reforms and more European Union. “There has been discussion for some time about the advisability of completing the institutional set-up of the Economic and Monetary Union, providing it with a common budget of adequate size,” says Visco. This step “would perform a stabilization function and would guarantee the supply of European public goods against own resources or debt issuance”. Such an innovation would remedy “the asymmetry between the multiple national fiscal policies and the single monetary policy”. This is a “long and uncertain outcomes” path, but one that would protect the country from vulnerabilities. Like the long-standing burden of public debt. A viable solution to the Treaties unchanged, “less ambitious” for Visco, could be “the preparation of a tool ready to be used in case of need, avoiding having to create programs from time to time to this, as happened after the sovereign debt crisis and during the pandemic ». In this way “confidence in the European ability to intervene promptly when necessary would be strengthened. The new instrument could finance joint projects of an exceptional nature or contribute to the macroeconomic stabilization of the area in response to shocks of particular magnitude ”. On the example of the program Next Generation Eu.
It will be necessary to continue the process of fiscal consolidation, to adopt structural reforms beyond those of the NRP, and to complete the innovation of the tax system, explained Visco. The safety net for the country, together with that put in place by the EU, passes through rules that have been known for some time, but often postponed. With the globalization in difficulty, the priority is to push towards a more mature Union.