Italian Meloni, unlike Truss, learning from history, opts for ‘stability first’


Giorgia Meloni, Italy’s new prime minister, is expected to preside over a relatively resilient economy, with public debt ratios set to continue falling and a potential opening for fiscal space thanks to increased funding from the European Union. in 2023-25.

Despite what officials call a “very difficult environment” and an “extraordinary shock” from war-fueled Russian inflation, Meloni’s right-wing government has so far maintained “stability above all” continuity with the previous administration of Mario Draghi.

A boost came from the lack of activism of Italian unions, with no sign of a wage-price spiral despite October inflation at 11.8%, the highest in 37 years. These are the key messages from OMFIF’s November 16 meeting of policymakers, investors and academics in Rome, organized with Assonime, the Italian business and enterprise research group.

Prominent League member Giancarlo Giorgetti, a junior government partner in the Meloni’s Brothers of Italy party that won the September 25 general election, became finance minister last month. It has so far stuck to a stable economic policy aimed at fulfilling the conditions for large-scale entries into the Next Generation EU fund.

Officials would like to see the yield spread between Italian and German 10-year government bonds decline to Spanish levels, around 1 percentage point, matching the position 12 months ago, from 2 points currently. The Banca d’Italia estimated a reasonable level for the gap at 1.5-2 percentage points, down from a peak of nearly 2.5 points earlier this fall and above 3 points when the coronavirus outbreak Covid-19 started in March 2020.

There is great interest in whether Giorgetti will replace as director of the Treasury Alessandro Rivera, an internationally renowned civil servant who has been in office since August 2018. Given the strong international sensibilities, Giorgetti is expected to take a pragmatic line.

There will be comparisons to the stubborn decision of Liz Truss, the short-lived former British Prime Minister, to sack, when he took office two and a half months ago, Tom Scholar, who had headed the British Treasury for six years.

Truss and Meloni took office at a time of stress in the bond market. Meloni’s carefully pragmatic line on economic policy underscores how much better she and her advisers have been at reading the lessons of economic history than her ill-fated British counterpart.

Italy, like much of Europe, has probably already entered a mild recession, caused by rising energy prices and global monetary tightening. But, after an expected fall in gross domestic product in the fourth quarter, activity is expected to stabilize in 2023, with the Ministry of Finance forecasting real GDP to rise by 0.6% next year, before recovering in 2024 and 2025. Covid-19 crisis that after the financial turmoil of 2007-09, real GDP in the third quarter exceeded the 2019 average. Support comes from tourism, exports and construction, the revival of activity in some sectors offsetting some of the inflation that has affected disposable incomes.

The unemployment rate of around 8% is a 10-year low, but rising labor force participation since 2020 (to around two-thirds of available workers) is contributing to a lack of wage pressure. Most of the centralized wage agreements were reached last January, before the bulk of the energy price hike. So some catch-up from the modest 2022 salary increases could take place in the new year. The government expects compensation per employee to rise by only 3.2% this year and 2.9% in 2023. The government’s firm hand on economic policy does not imply any further drastic tightening from the Central Bank European Union after the return of key interest rates to near-normal at the end of 2022.

Italy’s public debt to GDP ratio is expected to decline from 154.9% in 2020 and 150.3% in 2021 to 145.7% in 2022 and 144.6% in 2023, helped by real growth as well as inflation . Nominal GDP growth of 7.3% in 2021, 6.8% in 2022 and a forecast 4.8% in 2023, at a time of still relatively low interest rates, translates into lower debt ratios of a country whose government is highly indebted Germany, the euro zone’s largest creditor, readily admits this.

Debt pressures were brought under control thanks to an average debt maturity close to eight years. The ECB is no longer increasing its overall stock of government bonds after ending its net bond purchases in March. Moreover, Italy no longer benefits from asymmetric purchases of Italian debt in the ECB’s reinvestment of the bonds bought back.

An important factor helping Italy avoid tensions in the bond market will be NGEU inflows under Italy’s recovery and resilience plan, which is expected to reach 40.9 billion euros next year. and €46.5 billion in 2024 compared to €15 billion in 2022 and €5.5 billion in 2020-21. In this context, the possibility of Italy resorting to the ECB’s new anti-fragmentation mechanism, the transmission protection instrument, seems “very remote”, according to a senior official.

One of the major themes of Italian policymakers is that debt sustainability requires stronger growth, since “fiscal profligacy has not been the direct cause of the accumulation of public debt”. If Italy had maintained its average GDP growth rate over the past 15 years over the period 2000-07, Italy’s debt-to-GDP ratio would have fallen below 100% since 2017, according to a simulation by the Banca d’Italia.

The realization of these improvements by financial markets – helped by a move into positive territory of Italy’s net international investment position – is behind the recent compression of the 10-year bond spread in the Eurozone. Italy. Managers attach great importance to dialogue with rating agencies.

Further reduction in the spread requires credible follow-up on pre-election pledges. Meloni’s government is in its honeymoon period, but early signs are encouraging. These opinions echo those of Ignazio Visco, governor of the Banca d’Italia, in his OMFIF program of November 3, believing that the new government “does not seem to be on a different path” from that of Draghi.

Receiving and allocating Italy’s potential more than €200 billion in NGEU funds, which officials say are much more “downstream loaded” than previously projected, will be critical.

Possible fiscal multipliers could add about 1 percentage point to GDP growth in the first year, leading to a cumulative 3.6 percentage points by 2026. Careful targeting could improve public sector inefficiencies, “induce a more growth-friendly fiscal composition” and opening much more needed “fiscal space” to improve medium-term growth potential.

David Marsh is Chairman and Neil Williams is Chief Economist of OMFIF.


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