Dear Mr President of the Republic,
Dear Presidents of the Senate, of the Chamber of Deputies and of the Constitutional Court,
Dear Governor of the Bank of Italy
Dear President of the Academy,
Dear former presidents,
Dear fellows of the Academy,
and all authorities present here today,
I have many reasons to be grateful to Accademia dei Lincei today:
firstly, of course, for the prestigious Feltrinelli Prize;
secondly, for the incredibly kind words of praise in the motivation of this award;
and thirdly, for the possibility to make this speech in a place where research is the guiding light, a place made so prestigious by the scientific merits of its fellows.
I also have more personal reasons to be grateful today, as I have the chance to see many lifelong friends here in the audience.
Moreover, today gives me the opportunity to recall that all those individuals who have shaped my way of thinking with regard to economics were Accademia dei Lincei fellows.
Federico Caffè – class of 1970.
Sergio Steve, for whom I wrote my first financial sciences essay – class of 1967.
Franco Modigliani – a foreign fellow, class of 1991, who won the Nobel Prize for Economics.
Robert Solow – a foreign fellow, class of 1985, also winner of the Nobel Prize.
Today, I would like to express my thanks to them and to all of you!
Over a year has passed since the outbreak of the health crisis, and we can finally begin to look towards the future with greater confidence.
The vaccination campaign is making fast progress, both in Italy and in the rest of Europe.
After months of isolation and social distancing, the majority of our social interactions have now recovered.
The economy and education are taking off again.
However, we must be realistic.
The pandemic is not over yet and, even when it is, we will be dealing with its consequences for a long time to come. One of these consequences is debt, which is what I shall be talking to you about today.
The economic crisis that began last year is unprecedented in recent history; a recession largely caused by decisions that were consciously made by governments. To prevent a catastrophic spread of the virus, we had to impose restrictions that led to many economic sectors being shut down.
We had no choice.
Protecting health and protecting the economy were not conflicting objectives.
The high level of circulation of the virus and the risk of hospitals collapsing made it impossible to think about the recovery of consumption and investments. Health policies had to be the priority.
At that point in time, our only choice was between a recession and a depression.
One option was to take measures to ensure that the highest possible number of businesses would survive the restrictions and remain on the market, thereby causing a severe yet temporary recession.
Or, we could have done the opposite, as some claimed was the right thing to do at the beginning of the pandemic, not fully understanding the seriousness of the situation.
Had we opted for the latter course of action, consumption and investments would have stopped suddenly, causing a wave of bankruptcies and a deep depression. We would have seen entire production chains close down, with disastrous consequences for the future not only of the economy, but of Italy as a whole.
The price to pay for choosing a recession over a depression is debt.
The increase in debt recorded during this period was decided upon and, moreover, desirable.
The pandemic is a natural disaster.
Many businesses had to stop, not because they wanted to, but because they were forced to do so by the government.
As a community, it was in our interest to keep the production capacity of these businesses intact and to preserve jobs.
The only way of keeping companies afloat was to provide them with funding in order to at least partially compensate for the drop in turnover, helping them to save jobs.
We did this by providing subsidies and issuing guarantees on bank loans.
Since the beginning of the crisis, we have granted companies EUR 208 billion worth of guarantees, in addition to almost EUR 100 billion in support measures.
Subsidies have nevertheless led to an increase in public debt.
Guaranteed bank loans have led to an increase in private debt.
Total debt has increased significantly compared with 2019, representing a significant indicator of the economic cost of this pandemic; of course, that is without considering the pandemic’s impact in terms of social inequalities being made dramatically worse.
By the end of this year, Europe’s debt-to-GDP ratio will have grown by approximately 15 percentage points compared with 2019.
The European Commission estimates that Italy’s public debt will rise from 135% of GDP to 160%.
This is a greater increase than the one recorded after the Global Financial Crisis, in addition to which there has also been a significant rise in private debt.
It is also highly likely that both public and private debt will continue to grow, for a number of reasons.
We have to tackle the emergence of new and dangerous virus variants.
We must be ready to take decisive action should the pandemic worsen and threaten Italy’s economy.
Getting people back to work after this traumatic crisis will not be immediate.
The Government will continue to support them, just as it has done over the last two years.
The European Central Bank has estimated that, without public support, families living in the euro area would have lost almost a quarter of their income from work on average.
Thanks to the state measures implemented, this loss was limited to 7%.
Lastly, debt will continue to rise as a result of the guarantees issued on bank loans, which were necessary in order for credit institutions to be able to quickly provide liquidity to all companies that needed it, at a reasonable cost.
However, when those guarantees were issued, it was not possible for governments or banks to clearly distinguish between the companies that would be able to survive the pandemic and those that would not.
It would probably have been impossible, and perhaps even undesirable, to make that distinction at the time: we did not know the extent to which the health crisis would have transformed our behaviour and our level of consumption; in actual fact, we still don’t.
Part of the implicit debt represented by these guarantees will inevitably become payable, thereby increasing public debt.
Another reason to maintain expansionary fiscal policy is to boost growth.
The Italian economy has been underperforming for most of the last ten, if not twenty, years.
There is therefore the potential to use expansionary fiscal policy before creating inflationary pressures.
We’ve already been doing this over the last two years: in 2020, Italy’s deficit reached 9.5% of GDP and the European Commission has estimated that this will rise to 11.7% this year.
Just think that, only three years ago, questions were raised when this figure stood at 2.4% “maybe it’s too high, perhaps we need to remain at around 2%”; so, as you can see, there has been a significant leap.
The European Commission is currently estimating that Italy’s GDP will increase by 4.2% this year, as will also be the case in the EU.
I believe that these forecasts will be revised upwards, even quite significantly.
Consumer and business confidence are returning.
The ECB has stated its intention to maintain favourable financial conditions.
Moreover, as uncertainty fades, expansionary monetary policy will have an even more powerful impact.
Families and businesses are more likely to take out loans and invest when the future is more secure.
However, this expected recovery will not be sufficient to repair the damage caused by the health crisis.
We must reach higher and more sustainable growth rates than those recorded in our recent past and before the pandemic. This will enable us to help not only those who were unemployed prior to the health crisis, but also those who have lost their jobs during the last few months and those who may become out of work over the coming years.
The restrictions imposed over recent months have changed our consumption habits and our models of production.
Businesses across Europe, and especially small companies, significantly sped up their digitalisation process last year, with some estimates even stating that this process happened seven times quicker compared with previous years.
This is good news, but it also forces us to consider those who will be negatively affected by these transformations, such as lesser skilled workers whose jobs are particularly at risk in this era of digitalisation.
We intend to implement active labour market policies that will allow unemployed people to develop the necessary know-how for the professions of the future.
We must record growth that exceeds today’s forecasts, also in order to limit increases in debt.
Achieving a structural growth rate that exceeds the one prior to the health crisis would boost tax revenues and allow our economy to compensate for the increase in debt issued during the pandemic.
This would also create additional demand for companies, reducing their risk of bankruptcy and, consequently, the cost of state guarantee programmes for business loans.
These goals are not only desirable; they are also achievable.
As I have said in the past, public debt in the EU and in Italy has risen by approximately 20 per cent of gross domestic product over the last two years.
Even if we use the prudentially high interest rate of 2.5%, the annual cost of this debt would only amount to approximately half a percentage point of GDP.
Given that government revenue amounts to approximately 40-50% of GDP both in Italy and within the EU, it would be sufficient to increase the structural growth rate by 1-1.2 percentage points in order to cover the debt cost of the last two years.
Expansionary fiscal policies are therefore required, but we must bear in mind that not all are the same.
Today, we must focus particularly on investments, which will stimulate demand and improve supply.
The Government has already begun to do this, as can be seen in Italy’s National Recovery and Resilience Plan which was approved by the European Commission last week.
The investments provided for in that plan are necessary to overcome the gaps in both physical and digital infrastructure that have been accumulating over recent decades.
This is why Italy has not hesitated in making full use of all the funds made available by the EU in the form of both grants and loans.
However, we must also overcome the many structural obstacles that prevent us from realising our full potential and that hinder improvements in productivity.
Italy’s total factor productivity, representing a measure of our efficiency, was even lower in 2019 than it was in 2001.
In order to boost productivity, we must implement our programme of reforms.
We have already approved important measures to simplify administrative procedures.
We have begun to reform the public administration and the public sector recruitment process.
We have reformed the Environment Ministry, enlarging it and transforming it into the Ministry of Ecological Transition.
We have created the Ministry of Technological Innovation and Digital Transition.
Of course, if we wish to boost productivity, we need to do more than just create ministries; we also need to change what ministries do and ensure we have the right people to make those changes. This is precisely what we are doing.
The next steps are to reform Italy’s civil justice system, competition law and public procurement processes. Our goal is to help restore a climate of confidence between entrepreneurs and the State, encouraging higher rates of private investments in Italy compared with recent years.
Lastly, we must increase participation in the labour market among young people and women.
It may well be true that social cohesion is impossible without growth, but it is also true that growth is impossible without social cohesion.
Young people are the most vulnerable to the fragilities of our economy.
In southern Italy, around one in three are currently neither studying nor working.
Supporting the school-to-work transition has an important role to play.
We must ensure school programmes are in place that allow students to invest in specific skills early on, in line with their talents.
In this regard, we must enhance technical and vocational training institutes and strengthen their connections with the employment market, ensuring that there are enough specialised human resources to quickly satisfy demand among enterprises.
We must also step up the teaching of so-called “STEM” subjects (science, technology, engineering and mathematics) in order to encourage more young people to pursue a career in the scientific field.
All too often, women have to bear the majority of the care burden within their families.
This became clear at the peak of the pandemic, when women were much harder hit by the consequences of health restrictions than men.
We must remedy the lack of nursery schools and the inadequate infrastructure to care for the elderly.
Such measures will not only help women to enter the labour market, but will also support those already working to advance in their careers.
Today, increasing our level of debt is therefore the right thing to do, although this is not always the case.
This brings me to a distinction I made some months ago between what I call “good debt” and “bad debt”.
Debt may be classed as good, or bad, depending on how the relative resources are used.
It is particularly important to make this distinction at times of transition such as this one, when there may be greater productivity differences between potential investment projects.
Debt can make us stronger if it allows us to improve our country’s well-being, as was the case during the pandemic.
However, debt can also make us weaker if the relative resources are wasted, as has often happened in the past.
Debt can unite us if it helps achieve our goal of sustainable prosperity, both in Italy and in Europe.
However, debt can also divide us if it increases the spectre of moral hazard and budgetary transfers, as was the case after the financial crisis.
Let us take, for example, the common debt being used to finance NextGenerationEU.
Italy is the main beneficiary of this programme and therefore has an enormous responsibility to ensure it is successful.
Let me put it another way: just think that some governments, in other EU countries, have taxed their citizens in order to be able to give us money in the form of grants.
If we use these resources wisely, productively and honestly, it will not only be the Italian economy we are helping; we will also reinforce confidence within the European Union, providing a decisive contribution to the integration process that we hold so dear.
More generally speaking, for public debt to be classed as “good”, it may be used in one of the following ways: to finance targeted public investments; to allow for external shocks to be absorbed, such as defence during a war or the recent case of the pandemic; to implement countercyclical policies.
Countercyclical fiscal policies are particularly important in a monetary union as monetary policy alone is not sufficient to deal with isolated shocks affecting a given country.
This is even more the case today, as interest rates are nearing their lower limit and this is reducing the ECB’s ability to support aggregate demand on its own.
However, not all euro area countries are equally as able to use fiscal policy for stabilisation purposes.
If sovereign debt is not deemed to be ‘safe’, then stabilisation is only possible to a certain extent. In other words, there are countries whose debt is considered by the markets to be safe; interest rates on this type of debt are low and, above all, do not increase when the debt is issued. We then have the debt of other countries, without mentioning any names, whose debt is not considered to be safe by the markets; when this debt increases, interest rates tend to rise too.
So, if sovereign debt is not deemed to be safe, then stabilisation is only possible to a certain extent because the issuance of said debt may well lead to higher interest rates.
In fact, only certain countries have debt that the markets consider to be completely risk-free.
These countries can issue all the debt they need to tackle drops in private demand experienced during a crisis, without causing interest rates to rise.
An example of this was during the 2011 crisis.
The public debt of certain countries, such as Italy, was not deemed to be safe by investors, at the precise moment in time when the government needed to issue debt in order to deal with the crisis.
The ability of such countries to use fiscal policy was limited at the very moment they needed it the most, due to their interest rates rising.
Over recent years, the ECB has dealt with this problem by using expansionary monetary policy, although this was justified by the fact that medium-term inflation continued to be lower than the main target.
The European Central Bank was therefore fully justified in maintaining an expansionary policy.
This avoided economies falling into a vicious cycle, which is precisely what happened in 2011, when the lack of confidence in public debt caused increases in interest rates that in turn led governments to implement restrictive policies in an attempt to gain credibility.
This affected growth, the countries in question lost even more credibility and interest rates continued to rise. I’m sure we all remember that period rather well.
As things stand today, the inflation rate in the euro area remains low, requiring an accommodating monetary stance.
However, if inflation expectations exceed the ECB’s statutory target on a long-term basis, we may not see such circumstances again in the future.
At EU level, we therefore need to think about how we can allow Member States to issue ‘safe’ debt in order to stabilise their economies in the event of a recession.
Discussions on the reform of the Stability Pact, which is now suspended until the end of 2022, represent the ideal opportunity for doing precisely that.
A credible solution to this problem would allow the euro area to improve its ability to respond to crises, at the same time as further strengthening the independent role of the ECB.
Expansionary fiscal policy does not go against a gradual reduction in the debt-to-GDP ratio, which is necessary in the medium term in order to reduce the fragilities caused by overexposure.
However, it is now necessary to shift our attention away from the macroeconomic scenario and reflect on the far-reaching changes that our societies are preparing to face.
Governments have a crucial and active role to play in the energy transition, in acknowledging the importance of research and in paving the way for the future generations to achieve the targets set for 2030 and 2050.
This role not only refers to building key infrastructure for research and development, but above all to catalysing private investments in priority areas.
Helping companies to manage risk in new areas.
Drawing up transparent decarbonisation policies that are shared among countries.
This is a favourable time for Italy.
Thanks to the certainties provided by Europe and by the government’s choices, and given the country’s ability to overcome a number of what were considered ‘identity barriers’ in the political sphere, as well as the abundant public and private funds available, businesses and families now find themselves in exceptional circumstances, and they will invest capital and savings in technology, education and modernisation.
However, this is also the perfect time to combine efficiency with equitableness, growth with sustainability and technology with employment.
As I have said on other occasions, it is time for us to regain a taste for the future.
Let us make the most of it, with determination and solidarity. Thank you.