Italy: emerging from the crisis

1. Italy: emerging from the crisis XXXVII Meeting of the Network of Central Banks and Finance Ministries The Inter American Development Bank Washington, April 17, 2013 Giovanni Majnoni Banca d’Italia

2. 2008-2012: Italy was hit harder than other euro area countries by the crisis with a double dip … Euro-area GDP (indices 2005=100)

3. … caused by the sovereign debt crisis outbursts in 2011 and again in the summer of 2012.

4. The economic impact has been severe on households, which saw their real income and saving rate fall, … Gross Real Income (LHS scale) and saving rate (RHS scale)

5. … on the corporate sector, with industrial production falling 25% from its pre-crisis level, … Industrial production: changes (LHS scale) and levels (RHS scale) 5

6. … and on the banking sector, with credit quality progressively deteriorating. Loans to non-financial companies: Net balance between loans with improved and worsened ratings (as a percentage of loans outstanding at the beginning of the period) 6

7. Overall economic resilience benefited from banking sector’s“strong capital position” (2013 FSAP), … Core Tier 1 ratio of banking groups (percentages; end of period) Largest 14 listed groups Other groups

8. … banks’ strong liquidity position - liquid assets largely exceed cash outflows (FSAP 2013) - and … Net liquidity ratio of Italian banking groups (average value as a percentage of total assets)

9. … their reduced exposure to the sovereign risk, when compared with the recent past; … Government bonds held by the banking sector (as a percentage of the bond portfolio (blue line) and total assets (dotted line))

10. … from a built in process of fiscal consolidation that has led to a high and increasing primary surpluses;… Net liquidity position 1 ratio of banking groups (average value as a percentage of total assets) 10

11. … from a replacement of faltering domestic demand with foreign demand; … BoP: Trade (blue line) and Current account (violet line) (billions of euros; 12 month cumulative total)

12. … from the relative stability of real estate prices; and … Housing market: sales and prices (indices 2005=100)

13. … from a social safety net that has helped reduce lay offs, if not unemployment of a growing labor force. Employment and Unemployment rates Unemployment (percentage rate) Employment (millions of people)

14. The underlying problem is a growth slow down since mid-1990s ... Per capita GDP (index: US=100 – Source: Maddison, Conference Board)

15. ...largely due to a productivity gap whose determinants …

16. ... have been the subject of reforms in the last few years notwithstanding obstacles to their enactement. Small size of companies limits R&D, innovation, and productivity growth … Chart: R&D expenditure as a % of GDP … and so does a relatively poor and uneven business environment Chart: WB Doing Business country rankings

17. Low productivity growth and a tax rate among the highest of the euro area … Tax burden: Italy vs. the euro area 17

18. … remain an impediment to needed improvements in competitiveness. Effectiverealexchange rate based on production prices (1999=100) 18

19. Asymmetric exposure to real shocks remains a problem of European integration and suggests that … • The challenges of European integration in a nutshell • In the 1990s the dilemma between greater integration and greater freedom of trade and capital flows was that of the “Impossible Trinity” ( stable exchange rates-effective monetary policy-free capital flows). • In 1999 the Monetary Union cut the Gordian knot of the Impossible Trinity by removing the exchange rate. • Since the year 2000 challenges to stability within the EMU have been partly similar to those of “dollarized economies”. Specifically: • Seignorage loss  not relevant for Euro area countries because addressed at inception through the revenue sharing mechanism (capital key) • Lack of LLR  addressed in 2011 with the LTROs and in 2012 with the OMT (work in progress with the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM )) • Greater exposure of participating countries to real and foreign shocks  solution pending 19

20. … after a combination of policies to defuse the crisis at the European and national level… • At the Europeanlevel: • Introduction of LTROs to defuse the bank-sovereign loop • Introduction of OMT to defuse the sovereign-bank loop • Steps toward the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM) aim at two goals to support of LLR effectiveness • At the Italianlevel: • Bring public finance on a sustainable path (reduce country risk) • Insure banking system resilience (high solvency and liquidity ratios) • Contain the destruction of productive skills through social safety nets • Promote productivity and competitiveness (labor market reform) 20

21. … economic policies must now focus on competitive and growth gaps. At the Italianlevelmainareas of interventions are: Public Finance • Extensive spending review (to reduce unproductive public expenditure) • Broad restructuring of taxation linked to the growth agenda (rebalancing from income to real estate taxes) • Reduction of tax rates (especially in the labor market) through a parallelreduction of the size of the underground economy Growth agenda • Further opening-up of markets (especially services) to competition • Legislative and administrative simplification • Improving the efficiency of the labor market • Promotion of human capital (education) • Making the administration of justice more efficient

22. Data sources for updates Economic Bulletin, Bank of Italy (published quarterly) http://www.bancaditalia.it/pubblicazioni/econo/bollec Financial Stability Report, Bank of Italy (published twice a year) http://www.bancaditalia.it/pubblicazioni/stabilita-finanziaria/rapporto-stabilita-finanziaria