A cautious move that is not enough to revive Italy. Ignazio Visco speaks

A cautious approach is not enough to revive Italy. “To consolidate the results achieved, including on the cost of debt, it is crucial to have a prospect of economic growth and social development,” Ignazio Visco, who led the Bank of Italy from 2011 to 2023 and is now its honorary governor, told Il Foglio, commenting on the Budget Law approved by the Council of Ministers last week. “I certainly appreciate Minister Giancarlo Giorgetti’s prudence and the undeniable results achieved, including on the markets, which have made it possible to keep interest costs on public debt in check. But ad hoc measures, with ad hoc funding, do not help to realise this prospect of growth and development for the country.” The resurgence of calls to “scrap the Fornero law”, as proposed by Deputy Prime Minister Matteo Salvini, and the budget measures establishing a fund for measures relating to retirement, are examples of this.

“We keep discussing pensions when, with the reform of fifteen years ago (the 2011 pension reform, ed.), we were able to stabilise the system and resolve a problem that posed enormous risks. People haven’t realised that they should be grateful for the Fornero law. The demographic problem is clear: we are getting older and the working-age population is shrinking, but it is work that generates the income supporting those in retirement. Life expectancy, however, is rising, health is improving and many jobs are less physically demanding. It is possible – and indeed necessary – to work beyond the conventional retirement age of sixty, using technology rather than being used by it. Going against the grain, as they wish to do in France and as we keep hearing people say in Italy, is a huge mistake in terms of long-term prospects.”

Visco urges us to look at the projections for social spending: according to the European Commission’s Ageing Report 2024, in the baseline scenario, Italian spending on pensions, healthcare, long-term care and education, after rising over the coming decades, would fall from 27.3 per cent of GDP in 2022 to 25.3 per cent in 2070 – a year in which it would stand at 29.2 per cent in France, 29 per cent in Spain and 26.4 per cent in Germany. “Our social spending has a more sustainable outlook than that of France and Spain and, in the long term, even than Germany’s, which is not doing what it knows it ought to do,” explains Visco. Indeed, following the AfD’s victory in Saxony-Anhalt in September, the German government – at the request of the SPD leader and Finance Minister, Lars Klingbeil – has called into question the pension reform set out in Chancellor Friedrich Merz’s programme: a necessary overhaul, but one that is extremely unpopular in the run-up to the April elections in three Länder (Saarland, Schleswig-Holstein and North Rhine-Westphalia)..

The Commission’s projections mentioned above, however, assume an average annual increase in Italy’s potential GDP of 1.1 per cent: “We absolutely must grow by at least 1 per cent. We must do so in order to sustain public healthcare, education and social security, with a private sector that complements rather than replaces these. But to generate income, we need innovations that we are currently unable to deliver. We can increase the participation of women and young people and take immigration into account. But this is not enough without a rise in productivity: we need innovation and an extraordinary effort in education”. Visco therefore emphasises the importance of education and young people: “Giving 100 euros from birth may be an attractive idea, but it is not enough,” he comments, referring to the INPS ‘Valore Nuovi Nati’ fund proposed in the 2027 Budget Bill: 100 euros a year until the age of 18 for children born from 2027 onwards. “We need to improve our schools and invest in education, working alongside families and businesses. The young people protesting have their reasons, but they must also demand better and more education. Learning outcomes are disappointing: without a broad education, the risk is great. In a Budget Bill, these issues are probably difficult to address, but I do not see them in any feasible government programme.” On the tax treatment of the self-employed, however, commenting on the proposal in the budget to extend the flat-rate scheme to 100,000 euros, Visco is critical: “We cannot have different types of citizens. Rewarding tax evasion or seeking small advantages by avoiding a progressive tax system is, in certain cases, a mistake. We must make a huge effort towards tax equality.”

Meanwhile, Europe is in the throes of an energy crisis (as well as political, migration, demographic and housing crises). Istat’s preliminary estimate for October points to annual inflation of 5.4 per cent, with energy prices in Italy rising by 31.4 per cent, up from 22.6 per cent in September: “The energy component weighs more heavily in Italy than in other countries,” comments the honorary governor of the Bank of Italy. “Core inflation (excluding energy and food, which are more volatile, ed.), on the other hand, has remained broadly around 2 per cent and is lower than the European average, which stood at 2.5 per cent in September. We therefore have high headline inflation, but lower core inflation: this means that price rises are not yet being passed on to the economy across the board. This is because, despite high employment, demand is not particularly strong and real wages are not rising because productivity is not growing.” Second-round effects – those that cause inflation to persist through a wage-price spiral and are a cause for concern among central bankers – “are not yet visible”, says Visco. In 2022, Visco explains, there was a spike that subsided more quickly: “Now the rise appears smaller but is significant, because it has been prolonged over time”. And it is precisely this that makes the ECB’s task difficult: “The conflicts do not seem to be moving towards a solution and a just peace. If these price rises were to remain at current levels, inflation would subside within a few months,” explains Visco. The problem is if the markets were to start anticipating, over the long term, a pass-through of price rises not only for oil, but for everything linked to agriculture: fertilisers, wheat and transport – with the latter proving difficult both from the Black Sea and the Middle East – then prices would risk rising further”. The governor then adds: “The European Union must have a stronger voice on conflicts: we are among those hardest hit, yet we are the ones with the least say in the matter.”

This is how Visco explains the ECB’s stance: “The costs of this external shock must be borne; they cannot be sent back to the sender – there is little that can be done. But instead of blaming the ECB as a scapegoat, governments must at all costs prevent public finances from going off the rails”. Visco says he appreciated Giorgetti’s recent remarks, when on Friday he explained that for Italy, fiscal stability takes precedence over any economic policy. Could the French fiscal crisis trigger a sovereign debt crisis like the one you dealt with as governor from 2011 onwards? “Not for the time being,” replies the governor. The markets have given this some thought and believe that, ultimately, France will have to tackle its budgetary problem; they are waiting for the elections. During the election campaign, however, we’ll hear some absurd things.” He explains: “In France, paradoxically, there is still a conflict between wages and profits, and no attention is paid to unearned income, as if it were the last country where the class struggle is truly felt. Perhaps, if they tackled these problems together with Europe, it would be an even better solution.”

On the upcoming elections – from the Spanish ones in November to the Italian and French ones in 2027, where Marine Le Pen is the favourite in the polls for the latter – Visco comments: “The greatest risk is a result that pushes countries to move away from the EU rather than closer to it, just when European efforts – rather than modest national investments – are needed for growth. I call this the paradox of sovereignty: one thinks one is sovereign in one’s own country, but if there is no European sovereignty, one is not sovereign even in one’s own country.”

Whoever succeeds Christine Lagarde, who is due to leave the ECB on 7 February, will also have to deal with those governments. The frontrunners are Pablo Hernández de Cos, former governor of the Banco de España and currently General Manager of the Bank for International Settlements (BIS), and Klaas Knot, former president of the Dutch Central Bank: “I know them well and can say that both would be suitable. They are also less different than people say. As an economist, De Cos has perhaps gone into greater depth; Knot’s experience as a central banker, however, is extensive. On an analytical level, I was perhaps more accustomed to working with De Cos, whilst on decision-making I often found myself in agreement with Knot, with one exception.” The differences concerned interest rate rises following Russia’s invasion of Ukraine. “I would say so, but bearing in mind that mistakes could be made in either direction. At the outset, Knot was perhaps more mindful of the risk of excessive inflation and second-round effects. Personal perspectives matter: in the Netherlands, Knot saw very high employment and strong wage pressures, as was also the case in Germany.” On Knot, he adds: “He is very assertive and has long been described as a hawk, but I have also seen him reflect on even his most firmly held convictions, weighing them up against what was actually happening and listening to others.”

With the election results in France and Spain and the prospects for Le Pen and Vox, the successor will have to defend the ECB’s autonomy. “The ECB is sufficiently independent. The next president will need to be able to communicate, listen and bridge differences within the Governing Council, which also comprises the various central bank governors. They will then need to be able to account for decisions to the European Parliament, not to national governments, and will need to be able to justify them.” This is precisely the quality that Visco recognises in Lagarde: “We may not have agreed with some of her statements, and many criticised her because she was not an economist. But she did an excellent job of synthesising different viewpoints in times of crisis. De Cos is absolutely capable of justifying decisions. Knot might have someone pulling his strings, but both would be suited to the role.” Visco concludes: “One might rather ask: will the national governors, appointed by the governments, be sufficiently independent? I certainly think so.”