We interviewed Professor Davide Suverato, Senior researcher at ETH in Zurich.
We are experiencing a historic moment in many respects. Covid-19 has changed our habits, has changed our lives overnight. There is uncertainty and concern about our economy.
In this regard, according to IMF forecasts on how the pandemic will affect national economies, Italy is one of the most affected nations. What is the reason for this negative estimate?
Unfortunately, yes, Italy is one of the most affected economies. In particular, the IMF estimates a loss of 9.1% at the end of 2020 and, overall a loss of more than 5% for the most developed economies has been estimated. The reason why Italy will be one of the most affected country is because it was already caught in a period of stagnation. Italian economy in 2019 achieved an increase of 0.2%. So even before this pandemic changed any forecast. In addition, there is must be said that Italy has increased in recent years, even if only slightly, especially thanks to exports. Among GDP components, exports are the only ones that have been increasing for the past 2 years. Domestic consumption and investments were at 0, in terms of growth. Here, this pandemic will greatly affect all our business partners, as we can clearly imagine and, consequently, that growth engine, I mean, exports will be greatly reduced. For example, we think that China, the first of the various countries to reopen after a lockdown, reduced exports by 11% in March. Hence, Italy and Germany, which are the main trading partners, will follow the same path. So that engine got stuck. And it’s more important to us because we counted on exports much more.
In the EU is there a risk that the forced health isolation of the Member States will result in isolationism? What are the possible economic consequences if this scenario should occur?
Yes, there is a risk because some of the sovereignist parties that sit in the European Parliament are using the current situation to push towards a situation of isolationism. I would point out that these parties occupy less than a third of the seats in the European Parliament. So, it is a risk to consider, but a breakthrough of this kind is not imminent.
What are the economic costs, what would be the economic costs of an isolationism? Well, they would be very heavy for two reasons. First of all because the current crisis is not a situation that can be overcome if someone idicates virtuous behaviors and the others just follow them. All countries will have to run into debt to cope with the current situation precisely because this crisis is not a traditional economic crisis but stems from a health need to keep people at home to safeguard their health.
Economies cannot stimulate or be stimulated by countries in any virtuous way. In this case there is only one thing to do: to borrow wealth from the future, that is, get into debt. Everyone will have to do this, even those who, among the European countries, have been among the greatest hawks, among the greatest supporters of rigor.
The second reason is because, as I said before, exports count not only for Italy but for all European countries. Our main trading partners are European countries and we in turn are their main trading partners. So if one of our customers or suppliers gets out of this crisis with a very high cost, it’s a demage to all. Therefore, it is not the time to be isolationists and I am convinced that these accounts, not from an ethical point of view, but simply from the point of view of personal gain, will be clear to all member countries.
Professor, how do you judge the monetary policy of the European Central Bank so far? Do you think it will be enough or will less traditional maneuvers be necessary as Draghi did in 2011?
The ECB, or better, Governor Lagard took a misstep on her first outburst, in early March, when she argued in an interview, that “it’s not for the ECB to close the spreads”. Markets, obviously, perceived it as a sign of disengagement from what will be the measures to be taken. From that moment on, however, she has moved well. As early as mid-March, ECB has made available a 750 billion government securities purchase plan. This plan, surely, I think I can say, will be expanded. Italy is benefiting from this purchase plan. Just tihink that Italy already has already planned to place over 150 billion securities on the market by 2020. Almost all of these will be purchased by the ECB. The European Central Bank is doing its part as Draghi did in his day. I don’t think it’s appropriate to draw parallels, because unfortunately the situation is also very different from that of the time.
However, it must be understood immediately that the Central Bank alone cannot be enough. And it’s not about how much money it makes available. It’s a matter of the type of securities. The ECB underwrites the debt. Therefore, all purchases by the ECB go to increase the debt of a state, Italy or others. In addition, the ECB, by mandate, cannot keep buying governement securities of certain states only. Sooner or later it will have to rebalance its portfolio, therefore, this intervention is a temporary measure. Countries, with their fiscal policies, will intervene to overcome this crisis.
In a few hours the European Council will be held to discuss aid coming from the EU. Can you tell us something?
Yes. The European Council on April 23 will be a fundamental battle. I don’t like to take sides, but I have to. There will be two sides: that of the countries that will emerge from this crisis with debt of less than 100% of their GDP. They are the Northern European countries led by Germany. And those countries that, instead, will emerge from this crisis with a debt higher than 100% of their GDP, therefore Southern Europe and France. This is the important news compared to those who have the Franco-German axis in mind in recent years. Here, this axis has broken on numbers. Because France will get out of the crisis with a debt of more than 100% of its GDP. Hence, it has interests closer to those of the countries of Southern Europe. What will be discussed? The so-called “European solidarity” is not in question. We already have some programs: that of the ECB that I remembered, but not only; the European Investment Bank which means 200 billion guarantees; the SURE which is a sort of unemployment insurance paid by European funds, and the ESM, despite being much debated, are tools that already exist.
What will be discussed on April 23 is a different tool. The Recovery Fund differs from the other because the principle of this mechanism should be the following: the European Commission uses its own budget, therefore a budget in which all EU members have participated to issue debt securities. So, it is the European Commission that gets into debt using its own budget. And then, part of these debts is transferred as liquidity to the Member States. But at that point, this liquidity is not debt; is part of internal transfers between members of the European Commission. That’s why, the big game is between those who already have a large amount of debt and those who still have a debt below their GDP. Because above the psychological figure of 100% of debt on GDP, an additional amount of debt becomes much more expensive and even unsustainable for countries. The Recovery Fund mechanism, if approved, on the other hand, will make it possible to combine the ECB’s measures with this additional liquidity available to States, which will be financed directly by the European Commission, with its own risk as an issuer, and may not be derecognised from the balance, on the debt of individual states.
Professor, let’s close with a question about the future of Italy. In your opinion, which sectors in Italy will have a faster and longer lasting recovery?
It is very difficult to say it now also because the data we have now is not complete. Keep in mind that the previous two months are months in which we saw half of the economy in lockdown and the other half that was not in lockdown, however it was in a smart working situation which means lower and inefficient productivity. So it is difficult to measure on the basis of available data. The opportunity for Italy to get out of this crisis is to regain the word “investment”. That is, we will surely be aggravated by an unprecedented debt. Here, if this debt will be used to pay current expenditure, to buffer current losses, we will lose yet another opportunity. We should use this debt to invest in infrastructure. Of course, infrastructures related to healthcare because the emergency imposes it. But we should also use this debt to reposition Italy in the global value chain, that is to put it in a position to compete with commercial partners and not simply to go after Germany and then China, as has happened in recent years. If Italy is transformed into an economy that does not depend so much on exports but that will succeed thanks to investments to grow by internal demand then we will see a way out that will put us in a better position than how we entered this crisis. And the sectors that will show us if this path has been followed are certainly the infrastructure sector, in particular the telecommunications sector, and the services sector. Italy, compared to other European countries, is still largely driven by manufacturing. Here, investments in services, in services to businesses and people, are those sectors that will tell us that Italy is finally taking the path of a more profitable specialization.
We can say that it could be a good opportunity for Italy to become even better than before
Yes, we say that having to bear costs to change its production system, it is better to bear them when these costs are shared with other states, given that this crisis has affected everyone, including our competitors and our business partners, we know that they will be modernized, will we also be able to do the same? Will we also be able to change the way we produce and live? Maybe yes. We will not be able to do it this year, because the accounts are what they are. But the Monetary Fund tells us that within 3 years this crisis will be absorbed and we could see how it was absorbed. Really increasing or keep increasing by zero and something percent?! Here, I hope with real growth.
It’s nice to end this interview on this positive note, thank you professor