The economic and financial Outlook

Italy is the 8th world economy and the 7th largest market among developed countries (IMF – World Economic Outlook, September 2011). Italian GDP (2,117 $ billion, at current prices in 2010) follows US, China, Japan, Germany, France, UK and Brazil. IMF estimates that 2011 will confirm this ranking. Our economy has important strengths. Notably the small budget deficit, the low debt of the private sector, the solid financial condition of households, the soundness of the banks, and a limited foreign debt.
Italy’s budget deficit (4.6% of GDP in 2010) is fairly low (Germany is at 4.3% and France at 7.1%) and is expected to drop off to 4% in 2011. Our primary net borrowing in 2010 was one of the lowest (0.1% of GDP) among EU Member States (Germany -1.8%, France -4.6%). In the Euro area, only Estonia has registered, in the same period, a net lending (+0.3% of GDP).
According to the Bank of Italy (update: 17th October 2011), if the fiscal consolidation targets are met, the ratio of public debt to GDP should come down or stabilize even if interest rates on government securities were to undergo significant increases. Italy indeed maintained fiscal discipline during the recent financial crisis. By analyzing the GND (Gross National Debt composed of households, non financial institutions, government) it is evident that in 2012 Italy will be best positioned to service its GND compared to other leading western economies. Italy’s coverage ratio in 2012 is second to none.
It is important to note that a large part of the public debt is held by Italian families and institutions. Less then a half, 42%, is in fact held by foreign residents (the Euro zone average is 52.1%). This is a great shield against the types of hostile speculative attacks that can create an n artificial liquidity crisis.
FINANCIAL STABILITY AND GROWTH MEASURES
The global economy is at a critical juncture, the most critical since Lehman Brothers collapse. Global growth is weak and uneven. Downside risks have increased: in Europe, because of the negative linkages between sovereign debt and financial markets; in the US, due to households and public debt sustainability; globally, because of negative spill over effects and heightened risk aversion of investors, stretching also towards emerging market economies. All in all, the risk of a dangerous new phase in the world’s economy remains high. It would hit everyone, as we live in an interconnected world. The main message which came out the Cannes G20 Summit is two-fold: first, our urgent action is required; second, it has to be done now and together. The full range of policies outlined in the Cannes Action Plan for Growth and Jobs is broad and comprehensive. Differentiated fiscal consolidations; accommodative, and if needed unconventional, monetary policies; financial sector repair and effective regulation and supervision; growth enhancing structural reforms. These are all necessary at the same time. Otherwise, confidence would not be credibly restored, as the needed adjustment would be undermined by a sluggish, if not negative, growth.
THE NEW GOVERNMENT’S MEASURES
In this framework, the new Italian government’s response is ambitious and determined, building on the path of fiscal austerity which has been actively pursued in the last two years. At the same time, the Monti government knows very well what needs to be done to reach the core objective of reducing imbalances while achieving a sustainable growth. This is why an even stronger package of reforms and adjustments has been immediately presented at the beginning of December:
The overall fiscal adjustment now amounts to a cumulative €59.8 billion, the equivalent of around 3.4% of GDP. Taking into account forthcoming revisions of four macroeconomic projections, this is consistent with the balance budget target for 2013.
On the expenditure side, measures include cuts in central government expenditure, implementation of the public spending review, reform of the tax system and welfare by way of an Enabling Act. Consolidation targets of the Enabling Act are ensured by law through a safeguard clause which provides for automatic cuts in tax expenditures if forthcoming measures do not provide the expected savings (leading to €4.0 billion cumulative savings in 2012, €16.0 billion in 2013 and €20.0 in 2014). Measures include a wage freeze in the public sector until 2014. Moreover, reductions in social security spending are achieved by means of a payment delay in severance pay for seniority pensions.
Sustainability of Italy’s pension system is improved by strengthening eligibility requirements. As from 2014, the statutory retirement age of women working in the private sector will be gradually increased from 60 to 65 so as to align it with that of men by 2026. Furthermore, the introduction of an automatic mechanism for early and old age pensions as well as for old age allowances linking the statutory retirement age to expected developments in life expectancy, previously foreseen to start in 2015, is brought forward to 2013. Compared to previous legislation, this measure will structurally increase the age requirements by 4 months as of 2016.