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Italy is back!

Article - April 25, 2016

Minister of Economy and Finance Pier Carlo Padoan confirmed recently that economic expansion in Italy is accelerating, despite an unfavorable international environment. Growth and stability are being mainly driven by household consumption, which is being buoyed by confidence, incomes and investment – both public and private.


In an interview with United World, Mr Padoan explains the reasons why Italy, the second manufacturing powerhouse of the euro-zone, has a solid financial system and the banking reforms introduced to clear its NPLs. He also discusses the government’s pro-market approach, which entails tax cuts, fiscal incentives, and a privatization plan that will help boost Italy’s competitiveness while reducing public debt.


Emerging markets are now showing their vulnerabilities after the announcement of the Federal Reserve about increasing interest rates. Does it mean that after many years when there has been a rush towards emerging markets now is the time when developed economies are back at the core of the global investment trends?

Certainly emerging economies are doing worse than they did in the immediate aftermath of the financial crisis and the big recession. If you just think about Brazil or Russia or other economies, including oil-exporting countries, you see that these economies are suffering from lower commodity and oil prices that have generated problems with their revenues. And then of course the big question is whether China will succeed in transforming its structure from an investment to a consumption-led, service-based economy.

At the same time, advanced economies, like Europe, are slowly recovering from the recession. Of course the US is recovering faster, but that reflects the more flexible structure and higher integration of the United States compared to Europe. In all cases, however, the global economic outlook is characterized by widespread fragility.

Is this due, mostly, to monetary policy? I would put it differently. I think that central bankers have always made it clear that monetary policy is a very powerful tool, but by itself is not enough to deliver sustainable growth in the medium term. What you need is an appropriate fiscal policy and structural measures to boost long-term private investment.

If you look at what is the single most relevant variable that has been disappointing is investment, both private and public. Policymakers need to rebuild the foundations that allow strong investment to pick up.

Having said that, to conclude the point, I am confident that after this period of uncertainty and if policy action is appropriate, we can go back to sustained growth and less instability.


The banking reform is at the center of the debate within national authorities and also at the European level. What are the main changes introduced? And what do you expect to be the impact of clearing banks from NPLs on economic recovery and credit crunch?

In Italy we have introduced significant measures to reform the structure of the banking sector. The ongoing round of reforms has the purpose of encouraging the banking system to get stronger and leaner, by reducing the number of banks and consolidating them into bigger banks. This is necessary because financial markets are becoming global, so banks have to withstand global competition; and secondly, because in Europe financial regulation is becoming stricter and requires stronger banks. I fully subscribe to this European line. We are facilitating banks to go towards this new structure.

At the same time, we have introduced measures to facilitate the disposal of NPLs, which of course are relevant in a bank-centered economy, which has undergone a prolonged and deep recession. It’s natural in a way that we have such a high level of NPLs. However, it is important to note that the actual relevant amount of NPLs is much smaller than what you usually read in the press, as most of the time the media refer to the gross value of NPLs, which is covered in a large part by collaterals.

So we are taking a pro-market reform approach. We are helping the market by simplifying legislation to deal with litigation issues and disposal of impaired assets; providing a state guarantee that facilitates the exchange of NPLs; getting rid of the hangover of tax credits in the banks’ balance sheets; and encouraging the restructuring of the banking sector towards an American-oriented system which could also facilitate raising capital by the banks.


The private sector has now an unprecedented opportunity to gain a stronger foothold into Italy’s industry and equity market. What would you say is the economic value of the privatization plan and what is going to be the impact on Italy’s competitiveness?

Privatization is at the center of the strategy of the government and of course of my ministry, which is a shareholder of many state-owned companies.

Privatization is a multi-purpose strategy. Many observers look at the money the government can make by listing shares of SOEs on equity markets. However, this is not a sell out. I like to call it a part of the structure reform agenda because before you privatize a company, you have to put it in good shape. You have to revamp its business model; increase its profitability; and then once you’ve done that, you put it on the market.

This is what we have done with Poste Italiane; and this is what we are doing with Ferrovie dello Stato, which is the railway company; and also with other companies such as the air-traffic control agency, ENAV, which a competitive agency in its specific area of competence. Privatization contributes to debt reduction. The strategy has the purpose of increasing the competitiveness of state-driven companies to operate in a market environment.

What is your perspective about the sustainability of the public debt in the long term? And has there been a shift from austerity to investment with the 2016 Stability Law?

Italy has a very large debt, but this debt is beginning to decline with respect to GDP, starting in 2016 after eight years of climbing. This reflects both a more favorable growth perspective and a growth-friendly fiscal consolidation approach, which implies that our fiscal numbers are improving from the point of view of sustainability. At the same time, we are providing support to growth by changing the composition of the budget towards tax cuts.

This is one of the main avenues of the government strategy to provide credible and irreversible tax cuts for both households—which we did at the beginning and by reducing the tax on housing—and companies within the 2016 Stability Law. We will continue for the rest of the legislature to provide tax benefits to companies. Tax benefits are also responsible in a good sense for the increase in employment perspectives. This tax policy matches deliberately with the Jobs Act reform, as it introduces incentives for new, open-ended contracts. We have put tax benefits to further provide support for open-ended contracts and we are registering a solid growth in job figures.


The TTIP is one of the hottest topics that is being debated nowadays. In your opinion, is it a positive agreement or an unbalanced trade-off that will provide American multinationals a dominant market position in Europe?

I’m a strong supporter of the TTIP. I simply base my statement on evidence. If you look at successful growth stories, you will find that in most if not all cases, these are successful trade liberalization agreements. Of course, in the case of the relationship between the US and Europe, what you are talking about is sophisticated liberalization dealing with non-trade barriers, simplification, and standardization. Europe has a single trade policy, but that reflects the preferences of 28 member states. So we have to combine national preferences with continental ones and then we have to agree with the partner, the US, on these issues.

I am strong believer that this would boost growth on both sides. A number of adjustments will be necessary, but this is true for all trade liberalizations. From my point of view, the TTIP could be part of a major structural reform, which drives resources in the most profitable sectors and away from the unprofitable sectors. This is one of the basic principles of economics and don’t forget, I’m an economy professor.


Will Italy benefit from the TTIP?

Italy is the second strongest manufacturing center of the euro-zone. Italy’s strength is based on high-tech sectors, in particular in the capital goods and machineries sectors. We are at the forefront of technological advancements. Italy is a highly innovative country despite the small size of average companies. We have a great innovation potential and indeed part of the economic strategy is to leverage innovation activities, especially of SMEs. So we are very well equipped to serve sophisticated markets like the US because we offer something new and different. Based on innovation, and since I have lived in the US for many years, I know how that is appreciated. So I am confident and optimistic about the potential benefits for Italy arising from TTIP.