To the disappointment of politicians who hoped that Italy could now be allowed to embark on deficit financed growth schemes, Bank of Italy boss Ignazio Visco told the annual meeting of the central bank that the country has no room for fiscal relief, at least for this year. In the last last few days, the Italian press hailed the exit of the country from the excessive deficit procedure of infraction of the European Union as the signal the it could start pumping money again, as much as 12 billion euros this year alone according to some estimates, into its sluggish economy.
But on May 31st Visco told an audience of bankers and businessmen gathered in Rome for the central bank general meeting that as things stand it’s only “possible” that Italy’s economy, which is now in its eighth consecutive quarterly contraction, will begin to expand by the end of the year. While warning that there is no room for deficit spending for the time being, Visco instead called the government in Rome to actually implement legislated reforms: enacting reforms but failing to implement them is “a recurrent feature of our country’s history” he pointed out, and that’s the reason why Italy has failed to respond to geopolitical, technological and demographic changes of the past 25 years.
As Visco acknowledged that the current recession has negatively impacted Italy’s potential economic growth and is now threatening to put at risk social cohesion, he told the country business elite that the recipe for recovery, rather than deficit spending, is actually a “historic” adjustment which the country desperately needs. In his words, this adjustment has to involve education, welfare, income distribution and the “positional rents” that characterize a country with vast private wealth and poor income flows.
Italy needs that companies start investing resources of their own, while advocating public support for the business fabric is illusory: we cannot always ask others to shoulder the burden of reform, he stated. Addressing corporate Italy Visco said that companies should seek to integrate, by heading or joining, the global production chains, and seek more funding from capital markets instead of bank loans, while banks should help and not hinder them as they have in the past.
To achieve these objectives, in the Visco vision, the government should set credible medium-term goals in term of fiscal policy, but again, he noted, Italian politicians find it hard to mediate between the general interest and particular interests.