Interview with Daniele Franco, Minister of Economy and Finance #ItalyFinance

Research funding is emerging as one of the main targets of European countries in intervention plans to support growth. 

In Italy, where scientific research has never been seen as a main “asset” of the economy of our country, an economic intervention in this sector with important values ​​would constitute a cultural turning point. 

But can the relaunch of research really offer a positive boost to Italy’s production system? We asked Dr. Daniele Franco, in the first weeks of February, in his role as Director General of the Bank of Italy and President of IVASS. Daniele Franco has been the Minister of Economy and Finance of the Italian Republic since 13 February. His words and his vision of the future, also in the economic incentives for research, now take on a very absolute value, precisely in view of the great economic challenge that Italy will face in the coming years.

President Franco, the Bank of Italy performs its monetary policy function by taking part in the decisions of the ECB in the interest of the countries of the euro area. Due to the pandemic we are experiencing a very difficult moment with heavy repercussions on the economic and social situation of our country and the rest of Europe, as well as the world. In this context, what is the role of the Bank of Italy and what are the main monetary policy measures adopted at European level to deal with the serious consequences of the health emergency?

The pandemic has affected millions of people and caused many victims, it has changed the way of life in all countries. Very heavy economic effects have been added to the health impact. We are going through the worst recession in our modern history. In 2020 the fall in GDP was around 9 percent in Italy, just over 8 in France, 11 in Spain, 5 in Germany.

The reaction of governments and monetary authorities in all major countries was rapid and far-reaching. Governments have stepped in to provide income support for households and businesses. The European authorities have defined an extensive emergency intervention plan. The bottom Next Generation US aims to increase the ability to react to negative shocks of individual countries, to strengthen their growth potential and social cohesion; at the same time, it supports the transformation of European production systems in terms of the environment and digitization.

Central banks have acted to counter tensions in the financial markets. The Governing Council of the ECB has strengthened existing monetary policy measures and adopted new ones, including the securities purchase plan linked to the Covid-19 emergency, the Pandemic Emergency Purchase Program (PEPP), with an endowment now of 1.850 billion and a minimum duration until March 2022. New long-term refinancing operations were launched for banks on advantageous terms to ensure that companies could obtain the funds necessary to overcome the emergency .

The Bank of Italy collaborated with the ECB for the definition of these measures. At a national level, it participates in the Task Force coordinated by the MEF to monitor the implementation by the financial system of the measures launched by the Government to support households and businesses, such as the suspension of mortgage payments for the purchase of homes and the disbursement of loans backed by public guarantees.

How does the recession we are experiencing differ from those that have occurred in the past? For example those of 2008 and then of 2011.

The 2008 recession arose from a financial crisis, which originated in the American real estate mortgage sector and rapidly spread to various markets and countries. This was followed by a greater aversion to risk on the part of operators, which a few years later was reflected in their reaction to the financial and macroeconomic vulnerabilities of some euro area countries, including Italy.

The current crisis instead originates from a global health emergency, therefore from an exogenous shock with respect to the conditions of the economies of the various countries. This crisis produces effects on the demand side and on the supply side and has very different repercussions between the various economic activities. While in some sectors the direct impact of the epidemic is modest or nil, in others, such as tourism, air transport and various personal services, it is very heavy. This crisis is also characterized by a degree of uncertainty about future prospects that is unprecedented in recent recessions. For these reasons, the massive contrast policies, while limiting the most severe repercussions on households and businesses, have not managed to avoid product losses, which have been larger and more rapid than those observed with the global financial crisis at the end of the last decade and, in the euro area, with the subsequent sovereign debt crisis.

It is very difficult to predict what the effects will be on our behaviour, consumption habits and savings decisions. An important fact is that, in the face of so much uncertainty, Europe is demonstrating a greater ability to react than in the past through joint action in the health, economic and environmental fields. Unlike the European strategies for contrasting the two previous crises, based mainly on intergovernmental agreements, in the current emergency the initiatives of the Community institutions prevail, often with recourse to the common budget of the EU.

In drawing up intervention plans to support growth, all countries are giving great importance to research funding. In Italy, where this sector has never received a great “appeal”, an economic intervention is vital “oxygen”. In your opinion, can the relaunch of research offer a positive boost to the country’s production system?

For over 20 years, our country has grown little or gone backwards. There are many reasons: one of the most important lies in the difficulty of improving the efficiency of production processes and creating new products and services with high added value. We suffer from an innovation deficit, one of the reasons for which is the modest level of investment in research and development. These are 1,4 percent of GDP, less than half the level of advanced economies such as the United States and Germany. The commitment is insufficient both on the side of businesses, where the fragmentation of the productive fabric limits the ability to invest in research, and on the public side. Added to this is an average level of education that is still not adequate. Italy is the country in the European Union with the lowest incidence of young people with a tertiary education qualification, after Romania, and ranks last among OECD countries in terms of funding the university system. This situation is a brake on the adoption of new technologies.

This is not a lack of skills. Indeed, the indicators of productivity and quality of national scientific production place Italy on levels equal to or higher than the economies closest to us. Focusing on this resource can be a great opportunity, especially if we are able to foster closer collaboration between universities, research institutions and the production system.

The health emergency and its consequences have made us discover our digital side. We have all become more “connected” and ready to use the Web to satisfy even the simplest needs. What about central banks? How are they experiencing this digital transformation? How are they reacting?

Central banks have always been attentive to digital transformation, also because it influences crucial variables in the transmission of monetary policy. There is no doubt that the pandemic and the measures taken to limit contagion have helped to speed up processes that have already been underway for some time, including for central banks. For example, digital equipment has been increased to allow almost all staff to work remotely and ensure continuity of services offered to the community. As the Bank of Italy we are committed to strengthening the digitization of the country in the financial sector and guaranteeing the inclusion of population groups that currently have lower IT skills. Among the initiatives put in place is the opening, for some years now, of the “FinTech Channel”, a point of contact with operators that allows us to get to know in advance the technological innovation projects in the financial field. Furthermore, in December 2020 we inaugurated “Milano Hub”, a hub that involves industry and academia in the analysis and support of innovative projects.

Lastly, the possible impact of digitization on the issuance of money should not be forgotten. The public consultation launched by the ECB on the possible introduction of a digital euro has recently concluded and has attracted great interest. Preparatory studies will follow, on the basis of which the Governing Council will assess whether to launch a project aimed at defining the characteristics of a digital form of the euro. The process will require great caution, but its launch confirms the ability of central banks to react to the opportunities offered by digital transformation.

Looking again at the social effects of the epidemic, in your opinion, has the individual’s perception of the future changed?

The health crisis has induced changes in habits and imposed restrictions on social interactions. We still don’t know if what we are experiencing will permanently change our behaviors and expectations. Some changes may be temporary in nature, others may be long-lasting. I think of the relationship between private life and working life that smart working it is redefining within many professions.

Uncertainty and restrictions inspire prudent behaviour, raising the propensity to save, and make future plans difficult. Young people, in particular, are penalised. Distance learning, which has been widely used, reduces training opportunities and accentuates social imbalances; entry into the labor market has slowed down; this results in a reduction in the formation of human capital. Looking to the future, it is necessary to support the trust of people and businesses, showing a strong ability to invest today in future generations.

You are the General Manager of the Bank of Italy but you are also the President of IVASS, the institute which supervises the insurance market. This suggests that there is a complementarity between the banking and insurance markets and between banking and insurance supervision. Is that so? The banking and insurance sectors are similar, looking for example at the services they offer?

The banking and insurance sectors are contiguous worlds. In the past, the contact element was mainly represented by the so-called “bancassurance” model, ie the distribution of insurance policies through bank branches. The integration between banks and insurance companies has gradually strengthened, with mutual participation in risk capital, the presence of the two business segments within the same group and the formation of actual financial conglomerates.

This has also led to a progressive convergence between the regulations governing the two sectors and, in various respects, also between the two supervisory institutions. Today the organizational structure of IVASS is integrated with that of the Bank of Italy. It is clear that, in the face of convergences, significant differences remain between the banking and insurance sectors, especially regarding the types of products offered and the needs they are intended to satisfy. This is particularly true for the so-called “non-life” branch of insurance, which protects against events that damage assets or the possibility of earnings; the differences are more nuanced in the offer of savings and pension management products aimed at families.

To conclude, the crisis has affected almost all economic sectors. What is a possible recipe for getting out of the recession? And in this sense, what can be the contribution of research in the scientific, economic, social, digital fields and so on?

Until we are able to remove the limitations on social interactions, productive activity will remain slow in entire sectors; households and businesses will remain in conditions of high uncertainty. Public interventions and monetary policy can alleviate social costs and can safeguard the survival of firms, but they cannot prevent the fall in production. The availability of vaccines and treatments is the most important factor, also for the recovery of the economy.

Scientific research is crucial. Without the advances in medicine and biotechnology today we would be forced to pursue herd immunity by letting the virus circulate, with enormous costs in human lives. Furthermore, without digital innovations, social distancing measures would have crippled even larger swathes of our economy.

Looking to the future, a period of changes in consumption, production and international trade patterns is expected, determined by the effects of the pandemic, the need to combat global warming and the development of digitalisation. We don’t yet know what the new balances will be, but we certainly need to build the conditions to be able to adapt quickly to the changes. Italy must fill its gaps in innovation and human capital formation.

The development of an advanced economy is grafted onto knowledge, that crystallized in technologies, that which is deposited in people (human capital), that which is created in universities, research centers and in the innovative activity of companies. In order to return to growth, innovative investments and the ability to modernize the productive fabric and the public sector (administration, education, health) are needed, so as to be able to fully benefit from the scientific and technological progress on which Europe and all advanced economies count to meet the challenges ahead of us.