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The dangers of flat growth and a European decline – new fiscal and industrial policies are needed  

Here we are then – the Italian economy is at “zero growth”, as reported by Istat in this year’s third quarter, and this will drag on to the fourth quarter and to next year, so that the expected 0.5% GDP rise predicted by the Centro Studi Confindustria research centre seems like a much more realistic rate than the preposterous 1% – even 1.2% – forecasted by the government. No recession as yet, at least (the only EU country affected is Germany, which is however Italy’s main trade partner and the country where most Italian sub-supply chains are located), though fears of a slow-down, and therefore further and greater disproportion between public debt and GDP, are certainly justified.

Still, according to Istat statistics, there’s no negative impact on employment – in September 2023, the number of jobs went up by 42,000 units as compared to the previous month, and a year-on-year comparison shows an increase of 512,000, of which the vast majority (443,000) are permanent roles. “Plenty of work, little GDP”, is the concise comment by Dario Di Vico in Il Foglio (4 November), accompanied by “stagnant productivity yet rising employment rates”. Di Vico offers two possible explanations for this phenomenon, which may be engendered either by “resilient” companies holding on to their workforce while waiting for an impending recovery (inflation is going down, the rates will stabilise and investments will resume) or – a more pessimistic view – by a rise in low-cost, low-paid jobs, as it often happens in times of crisis.

Only time – and updated figures – will tell which trends will prevail in the near future. One thing that remains unchanged, however, is the difficulty experienced by enterprises in finding the right people to fill available roles (the latest cry comes from mechanical engineering factories in the north-east of Italy – la Repubblica, 28 October). Moreover, ‘baby boomers’ – those born in the 1950s and 1960s – are now of retirement age – at a rate of half a million per year – and, according to Prometeia, “looking at a period up to 2030, only 400,000 people per year are available to take their place, which means a shortage of 100,000 units per year that will not be easy to address” (la Repubblica, 3 November).

Yet, despite all this, Italy is a ship that sails on, thanks to the persistent and obdurate effort of manufacturing enterprises that even in such difficult times continue to produce, innovate, invest and tackle the complex environmental and digital twin transition by exporting goods and conquering new higher added-value niches in the international markets (as attested and explained in last week’s blog post).

But they can’t do it all on their own – businesses are in need of wise European political decisions in line with the long-term strategies guiding the current development of the “knowledge economy”. Instead, what’s been introduced is a financial policy “devolving just 8% to enterprises” and unable to support investments, as entrepreneurial association Confindustria has now been repeating for a long time, while the EU also failed to implement proper common policies to address both the American IRA (Inflation and Reduction Act) and the monumental investments that China made to support its own high-tech companies.

Here’s the key question we need to answer to deflect a dangerous decline: how should we proceed? Marco Buti and Marcello Messori – a long-standing senior civil servant in EU commissioner Paolo Gentiloni’s cabinet and an authoritative economist in EU matters respectively – provide some good food for thought through a series of articles published in Il Sole24Ore (14 and 22 September), such as “The paths Italy must follow for a relaunch” and “A productive model to propel the EU into the future.”

According to Buti and Messori, “an effective integration of the European single market, which would be an asset for the region,” is difficult because “the danger of stagflation has not yet been fully averted” due to a production system dominated by Germany, relying on export goods manufactured through dependable yet obsolete technologies by small non-progressive companies dependant on just a few precarious energy providers (the Russian invasion of Ukraine has dramatically aggravated a glaring long-lasting issue) and on insufficiently competitive high-tech services.

We are seeing “European delays concerning the digital sphere and Artificial Intelligence as compared to the United States and China” and “new divergence risks within the EU”, accentuated indeed by the “relative weakness of the German economy, which is impacting those countries more deeply integrated into its value chain (The Netherlands and Italy).”

Basically, “without a change of pace,” the European economy “may be doomed to fall into a marginal role and its social model may progressively deteriorate.” Further, “stagnant demographics” are exacerbating the situation, so that “only if the EU succeeds in building a more competitive production system its wealth can be safeguarded.”

But how? “We already know what needs doing, which is at the heart of the initiative implemented in response to the pandemic shock: the Next Generation EU agreement, which entails a triple – ‘green’, digital and social – transition.” In other words, the answer lies in sharing European resources so as to attain a competitive level of sustainability, strengthen the knowledge economy, and enhanced education and research.

An “impervious path”, no doubt, yet a necessary one, on which we can embark by “consolidating the European fiscal capacity through an efficient allocation of member states’ public and private resources.”

A more integrated Europe, then, without forgetting security issues and EU common funds devolved to sourcing energy and strategic raw material.

Quite the opposite of new nationalist agendas whereby each single country sees Europe like a personal cash dispenser, ignoring common constraints, obligations and values.

And what about Italy? Buti and Messori believe that it is in Italy’s best interest to “break the current institutional stalemate concerning EU economic governance” and approve the “new fiscal policies that, in line with the proposal made by the Commission last April, would fine-tune national budgets in keeping with each country’s individual traits and with due respect for macroeconomic growth and fiscal sustainability.” These would indeed be key policies for Italy, which owing to its exceedingly high public debt has very little room for manoeuvre in terms of public funds available for productive investments and corporate incentives. Finally, the situation would also further improve through a fast approval of the ESM’s policies.

Secondly, “We should ensure that significant private holders of Italian wealth provide not only liquid instruments but also activities funding production”, and again, with appropriate tax incentives and a very different take on taxation – i.e. seen as a benefit to investors and manufacturers rather than as a means to facilitate tax evasion (through tax abatements) or to profit those corporate groups protected by low-cost licences and concessions.

Thirdly, the considerable resources made available by the PNRR (the Italian recovery and resilience plan), which provides for genuine fiscal support, should be promptly and properly put to use. In essence, “only by adopting these measures can Italy avoid getting caught into pro-cyclic fiscal policies and become part of the model for industrial decarbonisation invoked, in mid-September, by EU President Ursula von der Leyen, in her speech describing the state-of-play of the European Union. Europe, sustainable development and civic economy – these are indeed the best paths for Italy.

(photo Getty Images)

Here we are then – the Italian economy is at “zero growth”, as reported by Istat in this year’s third quarter, and this will drag on to the fourth quarter and to next year, so that the expected 0.5% GDP rise predicted by the Centro Studi Confindustria research centre seems like a much more realistic rate than the preposterous 1% – even 1.2% – forecasted by the government. No recession as yet, at least (the only EU country affected is Germany, which is however Italy’s main trade partner and the country where most Italian sub-supply chains are located), though fears of a slow-down, and therefore further and greater disproportion between public debt and GDP, are certainly justified.

Still, according to Istat statistics, there’s no negative impact on employment – in September 2023, the number of jobs went up by 42,000 units as compared to the previous month, and a year-on-year comparison shows an increase of 512,000, of which the vast majority (443,000) are permanent roles. “Plenty of work, little GDP”, is the concise comment by Dario Di Vico in Il Foglio (4 November), accompanied by “stagnant productivity yet rising employment rates”. Di Vico offers two possible explanations for this phenomenon, which may be engendered either by “resilient” companies holding on to their workforce while waiting for an impending recovery (inflation is going down, the rates will stabilise and investments will resume) or – a more pessimistic view – by a rise in low-cost, low-paid jobs, as it often happens in times of crisis.

Only time – and updated figures – will tell which trends will prevail in the near future. One thing that remains unchanged, however, is the difficulty experienced by enterprises in finding the right people to fill available roles (the latest cry comes from mechanical engineering factories in the north-east of Italy – la Repubblica, 28 October). Moreover, ‘baby boomers’ – those born in the 1950s and 1960s – are now of retirement age – at a rate of half a million per year – and, according to Prometeia, “looking at a period up to 2030, only 400,000 people per year are available to take their place, which means a shortage of 100,000 units per year that will not be easy to address” (la Repubblica, 3 November).

Yet, despite all this, Italy is a ship that sails on, thanks to the persistent and obdurate effort of manufacturing enterprises that even in such difficult times continue to produce, innovate, invest and tackle the complex environmental and digital twin transition by exporting goods and conquering new higher added-value niches in the international markets (as attested and explained in last week’s blog post).

But they can’t do it all on their own – businesses are in need of wise European political decisions in line with the long-term strategies guiding the current development of the “knowledge economy”. Instead, what’s been introduced is a financial policy “devolving just 8% to enterprises” and unable to support investments, as entrepreneurial association Confindustria has now been repeating for a long time, while the EU also failed to implement proper common policies to address both the American IRA (Inflation and Reduction Act) and the monumental investments that China made to support its own high-tech companies.

Here’s the key question we need to answer to deflect a dangerous decline: how should we proceed? Marco Buti and Marcello Messori – a long-standing senior civil servant in EU commissioner Paolo Gentiloni’s cabinet and an authoritative economist in EU matters respectively – provide some good food for thought through a series of articles published in Il Sole24Ore (14 and 22 September), such as “The paths Italy must follow for a relaunch” and “A productive model to propel the EU into the future.”

According to Buti and Messori, “an effective integration of the European single market, which would be an asset for the region,” is difficult because “the danger of stagflation has not yet been fully averted” due to a production system dominated by Germany, relying on export goods manufactured through dependable yet obsolete technologies by small non-progressive companies dependant on just a few precarious energy providers (the Russian invasion of Ukraine has dramatically aggravated a glaring long-lasting issue) and on insufficiently competitive high-tech services.

We are seeing “European delays concerning the digital sphere and Artificial Intelligence as compared to the United States and China” and “new divergence risks within the EU”, accentuated indeed by the “relative weakness of the German economy, which is impacting those countries more deeply integrated into its value chain (The Netherlands and Italy).”

Basically, “without a change of pace,” the European economy “may be doomed to fall into a marginal role and its social model may progressively deteriorate.” Further, “stagnant demographics” are exacerbating the situation, so that “only if the EU succeeds in building a more competitive production system its wealth can be safeguarded.”

But how? “We already know what needs doing, which is at the heart of the initiative implemented in response to the pandemic shock: the Next Generation EU agreement, which entails a triple – ‘green’, digital and social – transition.” In other words, the answer lies in sharing European resources so as to attain a competitive level of sustainability, strengthen the knowledge economy, and enhanced education and research.

An “impervious path”, no doubt, yet a necessary one, on which we can embark by “consolidating the European fiscal capacity through an efficient allocation of member states’ public and private resources.”

A more integrated Europe, then, without forgetting security issues and EU common funds devolved to sourcing energy and strategic raw material.

Quite the opposite of new nationalist agendas whereby each single country sees Europe like a personal cash dispenser, ignoring common constraints, obligations and values.

And what about Italy? Buti and Messori believe that it is in Italy’s best interest to “break the current institutional stalemate concerning EU economic governance” and approve the “new fiscal policies that, in line with the proposal made by the Commission last April, would fine-tune national budgets in keeping with each country’s individual traits and with due respect for macroeconomic growth and fiscal sustainability.” These would indeed be key policies for Italy, which owing to its exceedingly high public debt has very little room for manoeuvre in terms of public funds available for productive investments and corporate incentives. Finally, the situation would also further improve through a fast approval of the ESM’s policies.

Secondly, “We should ensure that significant private holders of Italian wealth provide not only liquid instruments but also activities funding production”, and again, with appropriate tax incentives and a very different take on taxation – i.e. seen as a benefit to investors and manufacturers rather than as a means to facilitate tax evasion (through tax abatements) or to profit those corporate groups protected by low-cost licences and concessions.

Thirdly, the considerable resources made available by the PNRR (the Italian recovery and resilience plan), which provides for genuine fiscal support, should be promptly and properly put to use. In essence, “only by adopting these measures can Italy avoid getting caught into pro-cyclic fiscal policies and become part of the model for industrial decarbonisation invoked, in mid-September, by EU President Ursula von der Leyen, in her speech describing the state-of-play of the European Union. Europe, sustainable development and civic economy – these are indeed the best paths for Italy.

(photo Getty Images)