Italy: emerging from the crisisItaly: emerging from the crisis

XXXVII Meeting of the Network of Central XXXVII Meeting of the Network of Central Banks and Finance MinistriesBanks and Finance Ministries

The Inter American Development Bank The Inter American Development Bank Washington, April 17, 2013Washington, April 17, 2013

Giovanni MajnoniGiovanni MajnoniBanca dBanca d’’ItaliaItalia

2008-2012: Italy was hit harder than other 2008-2012: Italy was hit harder than other euro area countries by the crisis with a euro area countries by the crisis with a double dipdouble dip … …

Euro-area GDP (indices 2005=100)

2005 2006 2007 2008 2009 2010 2011 201296

98

100

102

104

106

108

110

112

96

98

100

102

104

106

108

110

112Euro areaItalyGermanyFrance

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

0

100

200

300

400

500

600

700Jan-

11

Feb-

11

Mar-1

1A

pr-1

1M

ay-11

Jun-

11

Jul-1

1A

ug-

11

Sep-

11

Oct-1

1N

ov-11

Dec-

11

Jan-

12

Feb-

12

Mar-1

2A

pr-1

2M

ay-12

Jun-

12

Jul-1

2A

ug-

12

Sep-

12

Oct-1

2N

ov-12

Dec-

12

Jan-

13

Feb-

13

Mar-1

3

Italy 5 year CDS Spreads (in basis points)

SovereignAverage 4 large banks

The economic impact has been severe on The economic impact has been severe on householdshouseholds, which saw their real income and , which saw their real income and saving rate fall, …saving rate fall, …

Gross Real Income (LHS scale) and saving rate (RHS scale)

2012201120102009200820072006200520042003200220012000

95

98

101

104

107

110

113

8

10

12

14

16

18

20

valori puntuali

media mobile di 4 termini

Propensione al risparmio (2); punti percentuali, media mobile di

4 termini; scala di destra

Reddito disponibile lordo reale (1); indice (1999=100), scala di sinistra

5

… on the corporate sector, with industrial production falling 25% from its pre-crisis level, …

Industrial production: changes (LHS scale) and levels (RHS scale)

200920082007 2010 2011 2012 2013-10

-8

-6

-4

-2

0

2

4

6

8

88

92

96

100

104

108

112

116

120

124Q/Q change (left change)

Point data

Three terms moving average

6

… … and on the and on the banking sectorbanking sector, with credit , with credit quality progressively deteriorating.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)

OverallOverall economic resilience economic resilience benefited from benefited from banking sectorbanking sector’’ss ““strong capital position” (2013 (2013 FSAP), …FSAP), …

Core Tier 1 ratio of banking groups(percentages; end of period)

Largest 14 listed groups Other groups

… … banksbanks’’ strong liquidity position - strong liquidity position - liquid liquid assetsassets largely exceed cash outflows (FSAP largely exceed cash outflows (FSAP 2013) - and …2013) - and …

Net liquidity ratio of Italian banking groups(average value as a percentage of total assets)

… … their their reduced exposure to the sovereign reduced exposure to the sovereign riskrisk, when compared with the recent past; …, 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 from a built in process of fiscal fiscal consolidationconsolidation that has led to a high and that has led to a high and increasing primary surpluses;…increasing primary surpluses;…

Net liquidity position 1 ratio of banking groups(average value as a percentage of total assets)

… … from a from a replacement of faltering domestic replacement of faltering domestic demanddemand with foreign demand; … with foreign demand; …

BoP: Trade (blue line) and Current account (violet line)

(billions of euros; 12 month cumulative total)

… … from the relative stability of from the relative stability of real estatereal estate prices; and …prices; and …

Housing market: sales and prices(indices 2005=100)

… … from a from a social safety netsocial safety net that has helped that has helped reduce lay offs, if not unemployment of a reduce lay offs, if not unemployment of a growing labor force.growing labor force.

Employment and Unemployment ratesEmployment

(millions of people)Unemployment(percentage rate)

The underlying problem is a The underlying problem is a growthgrowth slow slow down since mid-1990s ...down since mid-1990s ...

Per capita GDP(index: US=100 – Source: Maddison, Conference Board)

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

... have been the subject of reforms in the last ... have been the subject of reforms in the last few years notwithstanding obstacles to their few years notwithstanding obstacles to their enactement.enactement.

… and so does a relatively poor and uneven business environment Chart: WB Doing Business country rankings

Small size of companies limits R&D, innovation, and productivity growth …

Chart: R&D expenditure as a % of GDP

17

Low productivity growth and a Low productivity growth and a tax ratetax rate among among the highest of the euro area …the highest of the euro area …

Tax burden: Italy vs. the euro area

18

… … remain an impediment to needed remain an impediment to needed improvements in improvements in competitivenesscompetitiveness..

Effective real exchange rate based on production prices(1999=100)

19

Asymmetric exposure to real shocks remains a Asymmetric exposure to real shocks remains a problem of problem of European integrationEuropean integration and and suggests that …suggests that …

The challenges of European integration in a nutshellIn 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:

1. Seignorage loss not relevant for Euro area countries because addressed at inception through the revenue sharing mechanism (capital key)

2. 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 ))

3. Greater exposure of participating countries to real and foreign shocks solution pending

20

… … after a combination of policies to after a combination of policies to defuse defuse the crisisthe crisis at the European and national at the European and national level…level…

At the European level:Introduction of LTROs to defuse the bank-sovereign loopIntroduction of OMT to defuse the sovereign-bank loopSteps toward the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM) aim at two goals to support of LLR effectiveness

At the Italian level: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)

… … economic policies must now focus oneconomic policies must now focus on competitive and growth gapscompetitive and growth gaps..

At the Italian level main areas 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 parallel

reduction 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

Data sources for updatesData 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