by Andrea Bandelli

A critical phase

The Italian economy, after the dramatic fall in GDP in 2020 in the midst of the pandemic crisis and the significant, but still partial, recovery in 2021, is going through a very critical phase, in which GDP growth is losing momentum and is falling short of the forecasts made by the Government and leading analysts. On the contrary, some of the prerequisites for what could be defined as a real perfect storm are occurring, which could hit our country and have irreversible effects on the resilience of the national economic system and, in particular, on the resilience of our production system (consisting mainly of small and medium-sized companies).

The current simultaneous increase in the cost of raw materials and energy, the inevitable inflationary pressures and the consequent increase in interest rates by central banks (and therefore the cost of credit for economic operators and families), the progressive extension of supply and delivery times in the delocalized production chains, especially in Far Eastern countries (and the rising costs of container hire and transport) and the slowdown in domestic consumption (due to health restrictions, the lack of foreign tourist flows and the uncertainty of what the future prospects will be, which reduces the Italians' propensity to consume) make the economic picture extremely complicated. If we add to this the recent further increases in the cost of energy and the uncertainties regarding the continuity of natural gas supplies caused by the winds of war that are blowing in Ukraine, it can be understood that the current situation in our country is not the best.

Growing public debt

The Bank of Italy's monthly publication entitled Public Finance: requirements and debt as of December 2021, which contains data on general government broken down into the three subsectors (central government, local government and social security agencies) and the composition by creditor of the holding sectors (original maturity, residual life and currency), shows that as of December 31, 2021 Italy's public debt is equal to 2,678.4 billion euros. The increase in absolute values is 104.9 billion euros compared to the end of 2020 (when it was equal to 155.6% of GDP); an increase that is reflected in both the increase in general government requirements of 92.1 billion euros and the increase of 5 billion euros in Treasury liquid assets (which amounted to 47.5 billion euros).

The consolidated debt of central government amounts to 2,591.1 billion euros, an increase of 102.4 billion euros compared with the previous year. That of local authorities stands at 87.2 billion euros with an annual increase of 2.5 billion euros. The debt of welfare agencies has remained substantially stable. The average duration of debt is 7.6 years (up from 7.4 in December 2020). Likewise, the share of debt held by the Bank of Italy rose by 3.7% due to the increased purchases of public securities as part of the programs decided by the Eurosystem, standing at 25.3% compared to 21.6% in December 2020. Also in December 2021, annual tax revenues accounted for on a cash flow basis by the Bank of Italy amounted to 479.7 billion euros, an increase of 10.9% compared to those of 2020 (figures that do not take into account the approximately 1.2 billion euros relating to 'collection funds').

Debt-to-GDP ratio decreases

The Governor of the Bank of Italy, speaking a few days ago at the Forex in Parma, stated that, after the slowdown of recent months, "from next spring, with the gradual improvement of the health situation, the Italian economy should regain vigor" and GDP growth should continue in the current year at around 4% and then maintain this trend, albeit in a more attenuated manner, in the next two. Italian GDP growth has triggered a "virtuous" mechanism that has led to a reduction in the ratio of public debt to gross domestic product over the past year, despite an increase in the absolute value of public debt. This ratio will probably (we are still waiting for the final figures to be released at the beginning of March) settle at around 150% at the end of 2021, a level that is significantly lower than that contained in official forecasts and which bodes well for the sustainability of the country's debt in the medium to long term.

According to the Governor, at this stage our banking system is characterized by good solidity, the quality of credit is constantly improving thanks also to the important guarantee measures put in place by the State, in order to face the deterioration (due to the lack of profitability and liquidity of the economic system caused by the pandemic crisis). The limited cases of fragility mainly concern small and medium-sized banks with a traditional business model. Regarding the advisability of launching further public interventions to support the economy, the Governor declared himself contrary to the adoption of new stimulus and general support measures, whilst he believes that possible measures, both short-term and structural, aimed at reducing the cost of energy and supporting particular sectors considered strategic for our country, are acceptable and opportune.

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What is needed now

Ultimately, in order to try to get out of the umpteenth economic crisis, triggered by the pandemic, in addition to definitively overcome the emergency phase, our country certainly needs all those structural reforms envisaged in the Recovery and Resilience Plan (road and rail links and poor communication lines are all "minuses" that make us less attractive compared to our European competitors) aimed at bridging the existing gap in many productive areas or areas with a high tourist vocation. Targeted support is also needed for certain sectors of the national economy, but in our opinion this is not enough and it is very clear that something else would be needed. These include some strategic choices that are unavoidable and indispensable for looking to the future with confidence.

Among these there is certainly, in a phase of extreme difficulty for our companies in the supply and management of production chains strongly delocalized, that of adopting a real extraordinary plan of productive repatriation that aims to bring back on the national territory a good part of the productive activities of delocalized chain and also to favor the settlement of new activities in our districts. There would be obvious benefits in terms of creating new jobs, higher disposable incomes and the consequent increase in tax revenues. We would also have GDP growth, a fundamental factor in sustaining our heavy public debt.

Beyond to the United States, England and Japan, also some European Countries are from time implementing important policies of reshoring accompanied from remarkable appropriations of budget in order to support financially and economically the companies. Italy cannot afford to remain on the sidelines, leaving the initiative to individual virtuous entrepreneurs, because once established in another country (especially if European), those companies are unlikely to relocate to Italy in the future and, therefore, are to be considered definitively lost opportunities.

In order to do this, our country needs a comprehensive plan to support Italian companies that have completely or partially relocated their activities, such as the one published by our Center, based essentially on 5 pillars:

  1. Single Public Subject (for a clear and simplified relationship with the Public Administration);
  2. Fiscal pacts (for the certainty of fiscal relations with concessions and preventive agreements stable over time that guarantee the attractiveness of our country);
  3. Social security pacts (for labor costs that are competitive with other EU and non-EU countries);
  4. Territorial Pacts (for the orderly economic development of the territory, the recovery of disused industrial areas and access to regional tools to support returned activities);
  5. Business litigation reform (for clarity, speed of justice in step with other foreign jurisdictions).

We are convinced, also on the basis of the findings and historical analyses carried out on the experiences of other countries such as, for example, the United States, that in the medium-long term a measure of this magnitude, if sufficiently financed, could be extremely effective and important in keeping the Italian economy healthy and its accounts in order, especially when the suspension comes to an end and the stringent rules of the European stability pact come back into force. In that phase, a further structural increase in GDP and tax revenues will be fundamental in order to be able to respect European parameters.

In conclusion, reshoring, if well planned and financed, is an absolutely strategic choice for the future of the national productive system and the entire Italian economy.

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For the Centro Studi Machiavelli he is responsible for the research program on "Reshoring and business relocation". Graduated in Economics (University of Florence), he is a Chartered Accountant, Auditor and founding partner of a professional firm specializing in corporate consulting and national and international taxation.