Italy Central Bank Statement

Author: | Published: 5 Sep 2017
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Italy's economic growth is accelerating at a pace that the Bank of Italy now projects to increase to 1.4% in 2017, from a previous estimate of 1%. The cyclical improvement is spreading to most industrial sectors and positive signals have also emerged in services and construction. Investment excluding construction is growing at a faster pace than GDP, owing to favourable financial conditions and tax incentives.

While these cyclical developments are welcome, the Italian economy still needs to put fully behind it the worst crisis in its history: today Italy's GDP is more than 7% below what it was in early 2008, while in the rest of the euro area it is 5% above that level.

The banking system faces the legacy of the double-dip recession that made GDP decline by close to 10%. The system as a whole is not experiencing a crisis and the positive macroeconomic developments are helping Italian banks to strengthen their balance sheets. In 2016 the flow of new non-performing loans (NPLs) reached its lowest level since 2008, and the NPL stock continues to shrink. Problems at individual banks have been resolved or are in the process of being resolved. In particular, between end-June and early-July 2017 the Italian authorities, in full agreement with the European authorities, began the orderly liquidation of Banca Popolare di Vicenza and Veneto Banca with government support and completed the procedure for Banca Monte dei Paschi di Siena's access to precautionary recapitalisation, in full compliance with the European rules.

Since 2008, the ratio of public debt to GDP has risen rapidly, to the point of exceeding 130%, essentially because of poor nominal growth. Long-term projections, such as those made periodically by the European Commission, indicate no significant risks to the sustainability of Italy's public debt, also thanks to the reforms that have assured the financial equilibrium of the pension system. The high public debt is nevertheless a source of vulnerability and acts as a brake on the economy. A credible plan to achieve an appreciable and lasting decline in the debt-to-GDP ratio must commence without delay; it may gather its own momentum and could trigger a virtuous cycle similar to the one that allowed Italy to adopt the euro.

In order to catch up, Italy needs to resolutely overcome the rigidities that prevent a more robust and sustained growth rate. Economic policy must focus on improving the business environment and making productivity return to growth, by fully exploiting the opportunities that stem from the ongoing digital revolution. The intense reform effort that has been undertaken for the last five years should continue unabated; a legal framework more conducive to economic activity, more efficient product, capital and labour markets, and stepped-up investment in human capital remain critical goals.

It is an illusion to think that Italy's economic problems could be solved more readily outside the Economic and Monetary Union. Italy's competitiveness is not suffering from an overvalued currency. A departure from the euro, which is often discussed with scant knowledge of the facts, would not serve to heal the structural defects of the economy; on the contrary, it would generate serious risks of instability. The process of European integration has guaranteed 70 years of peace and prosperity. We must continue on this path, tackling the issues that still stand in the way of effective economic governance of the euro area.




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