Italy’s recovery: cyclical or structural?
Cyclical or structural? This is a question which I have often been asked about Italy’s economic recovery. Italy began showing some first signs of recovery in 2014, a year in which Italy posted a 0.1% increase in GDP after a double-dip recession between 2009-2013 which led to a 10% drop in the country’s output. In the following years the recovery grew stronger and now the economy is growing at a rate similar to that of other euro-area countries.
The cyclical components of Italy’s recovery are quite obvious: the European Central Bank’s expansive monetary policy and the recovery in international trade. These aspects of the current phase help explain fiscal consolidation and account for a share of exports. But Italian export performance vastly exceeds that of international trade. This manufacturing success story is due to the growing competitiveness of Italian companies which, during the recession, engaged in business reorganisation, invested to increase productivity and innovate their products, thereby improving their position in international markets.
Here we find the first of the structural components in Italy’s recovery: private sector investment encouraged through tax incentives induced businesses to choose new technology and state-of-the-art manufacturing paradigms falling within the Industry 4.0 category. Private sector investment is improving the competitiveness of Italy’s industrial base, as the age-old problem of poor productivity is being addressed.
The second structural component of recovery relates to the labour market, whose rules have been changed by the Jobs Act, a comprehensive set of measures that have also introduced active labour market policies to enable better matching of occupational demand and supply and offer a way to reduce social exclusion, by bringing human capital back into the production cycle.
The third structural component of recovery can be found in the banking sector. The reforms introduced starting from 2015 have profoundly changed the financial market: the reforms of both large and small cooperative banks (banche popolari and banche di credito co-operativo) have promoted mergers and acquisitions and have improved efficiency and competitiveness, while the reform of banking foundations helped sever the remaining ties between local politicians and financial powerhouses. A number of specific critical issues have been solved that cast doubts over the whole sector (even though one could count them on the fingers of both hands and have some left over). Systemically this caused a watershed thanks to which loans are now flowing back to the real economy.
However, innovation in the financial sector does not end there, because the increase and diversification of business funding sources continued over the course of this Parliament, thanks to the implementation of the “Finance for Growth” programme, aimed at reducing the Italian economy’s dependence on bank lending, mainly focused on the short term. After the considerable performance of mini bonds, for example, a veritable boom was registered following the introduction of PIRs (Piani Individuali di Risparmio — individual savings plans ) that will help channel funds to firms in future years.
Other structural changes are less known, even insiders are not familiar with them, but are just as important. Among these one that I consider particularly important is the reform of the tax administration. For three years now we have been implementing a radical change in the way in which the tax authority interacts with taxpayers: we have increased the range of services to firms, to ensure that tax planning can be based on predictable rules so as to reduce the risk of litigation. The principles of due process and simplification are the two cornerstones of the 2015 reform we have designed, and the implementation process is radically changing the behaviour of the tax authority, with the aim of putting these principles into everyday practice. I also attach great importance to the reform of insolvency law, currently being implemented, which has changed provisions dating back over 70 years and promoted restructuring and rescuing of ailing businesses.
Some of these structural changes underpinning Italy’s economic recovery have been recognised by international analysts, others are still underestimated.
This Parliament, which is drawing to a close, has been characterised by the introduction of long overdue structural changes, many of them at least two decades overdue. The impact of these reforms will grow stronger in future years; this is why I am convinced that the cruising speed the Italian economy has reached is set to increase in the short and medium term.
If in the future we continue along the path carved out during this Parliament, and I am confident we will, Italy, instead of just tinkering around the edges, can complete the structural overhaul of its economy, by addressing other constraints on growth that have conditioned its development in the last few years.
First and foremost the lack of investment in human capital, with action on education, which requires an increase in the available resources and a wider range of technical and scientific education and training courses. This will benefit youth employment as well as the country’s potential.
Government investment is another priority, which is picking up after the period of harsher austerity and which will increase as the reform of general government is being implemented.
Finally, mention should be made of fiscal consolidation: after eight years of continuous increases, the debt-to-GDP ratio was reversed in 2015. This ratio was stabilised also by pursuing the goal of achieving significant primary surpluses and a consistently declining deficit-to-GDP ratio. Following this narrow path, aimed at pursuing both economic growth and fiscal responsibility, Italy will finally be able to reduce its debt burden, freeing up resources for sustained and sustainable development.
Pier Carlo Padoan
Minister of Economy and Finance