MNI: Italy To Fall Into H1 Recession - Tremonti, Economists

The Italian economy is likely to contract in the first half of the year, senior economists and a former finance minister told MNI, with all three calling the government’s baseline forecast of 3.1% growth in 2022 too optimistic, particularly if the war in Ukraine drags on.

Former Finance Minister Giulio Tremonti, Giampaolo Galli from the Observatory on Italian Public Accounts and Luiss University Professor Veronica de Romanis see growth this year as more likely to be about 2%, a level which the government has said is only probable if imports of Russian gas are restricted.

Gross domestic product will contract again for a second quarter this year to June, leaving the country in technical recession, they said, noting that uncertainty is at unprecedented levels.

The three economists agree that Prime Minister Mario Draghi should resist political pressure to increase the budget deficit, particularly as borrowing costs rise. The prime minister is aware of the danger that Italian sovereign bond yields, which have already risen significantly with respect to benchmark German bunds, could blow out further, said Galli, while Tremonti and De Romanis agreed that fiscal stimulus was too great in 2021, leaving Draghi with little space to spend more this year.

“Last year’s stimulus was meant to lead to a stay at the Quirinale,” said Tremonti, referring to the official residence of Italy’s presidency, for which Draghi made an unsuccessful bid. “Now is when the negatives arrive.”

NO MORE EUROPEAN MONEY

The economists were sceptical that Italy will receive additional fiscal help from the European Union, which, as MNI has reported, government officials hope might come in the form of a new fund, modelled on the EUR800-billion-plus NextGenerationEU in response to Covid, to help countries boost defence spending and transition away from their dependence on Russian gas. (see MNI SOURCES: Italy Seeks EU Cover For Borrowing As Yields Rise) Nor are the European Central Bank’s attempts to develop a new tool to cap any excessive growth in bond spreads likely to be successful, they said.

The ECB’s existing plans to reinvest maturing debt from its Pandemic Emergency Purchase Programme should be sufficient to keep the lid on Italian spreads, at least while Draghi remains in office, said Galli, who also is a monetary policy professor at Universita Cattolica del Sacro Cuore and a former economist at the Bank of Italy. But a permanent new anti-fragmentation tool would be legally problematic, and any adjustment to the ECB’s Asset Purchase Programme could only deviate temporarily from capital key guidelines setting limits on purchases of individual countries’ debt, he said.

REFORM RECORD

Italy’s record on implementing economic reform is likely to limit its chances of receiving additional European funds, said Tremonti and De Romanis.

“We have irrelevant courts, an indecipherable plan to reform the tax system that will have to be concluded by the next government, and a reform of the public administration which is more show than substance,” said Tremonti. The former minister also commented that Germany’s announcement of a EUR100 billion increase in its own defence spending would not have been made if the will existed to implement a programme at European level.

After being the maximum beneficiary of NextGenEU, Italy cannot expect to be rescued again by Europe, said De Romanis. Instead the government should put more effort into a spending review announced as part of its package of reforms promised in return for European aid but which “no one talks about in Italy,” she said, noting that Draghi made a mistake when he called additional borrowing in 2021 “good debt” to fund future growth.

“Those words have served as an alibi for an irresponsible political class which always wants to spend more,” the professor said.