On September 18th, I was fortunate to participate in the National Conference of “Labor Knights”, the “Labor Knights”, the Italian Business Elite Federation. Recognition. The meeting was permeated with an atmosphere of optimism, but the timing of such optimism is indeed unusual. After all, the global economy is not only struggling to recover from the impact of the epidemic, but also struggling to adapt to the new normal of climate issues, supply chain congestion, and increased geopolitical tensions.
After more than 20 years of slow economic growth and below-potential performance, Italy’s optimism is surprising. But two complementary factors seem to be changing the rules of the game: a reliable and efficient government led by Prime Minister Mario Draghi, and the EU’s new willingness to provide strong financial support for investment. The two are not unrelated. In the sustained and strong economic recovery, private sector investment is the most direct driver of economic growth and employment. But the public sector must create an enabling environment by acting as reliable reformers and regulators, investing in key tangible and intangible assets.
People are confident in the ability of the current Italian government to perform these duties. First of all, Draghi’s past performance makes people respectful. As President of the European Central Bank, he kept his promise to promote European integration and prosperity, and was willing to take action when needed. In addition, the ministers appointed by Draghi in his government are all talented and experienced.
Although the Italian government has many advantages, it still faces strict fiscal constraints. As sovereign debt soars to 160% of GDP during the epidemic, the government will find it challenging to invest adequately in future growth. This is the role of the European Union. If the new crown pneumonia epidemic has taught the world a lesson, it is that no one is safe until everyone is safe. Similarly, if the rest of the EU finds it difficult to finance investment and sustain growth, then no part of the EU will be able to continue to realize its economic potential.
Therefore, in 2020, the EU agreed to establish a 750 billion euro recovery fund to fund important areas such as human capital, research and development, digital transformation and clean energy transition. The fund can play a real role not only because of its size, but also because the financing is conditional on a reliable national plan, and the financing is carried out in stages to determine whether it is effectively implemented.
The conclusion of the recovery fund marks a new direction for the European Union. After the 2008 global financial crisis triggered a series of debt crises across Europe, the proposal of fiscal transfer payments was strongly resisted, when advocates of fiscal austerity prevailed. But this time, fiscal austerity will not be implemented. Part of the reason for this discrepancy may be that the new crown pneumonia epidemic has hit the global economy, and the debt crisis after the 2008 crisis was blamed on the “financial irresponsibility” of individual countries. Regardless of its motives, the EU has suffered greatly from its post-2008 practices, which have severely undermined cohesion and solidarity.
Today, the situation seems to be changing. As far as Italy is concerned, although the reform agenda is still in its early stages, people’s confidence in the government’s integrity and capabilities has brought it more domestic and foreign investment. This confidence also promotes the EU to provide more active financial support, further boosting investor confidence.
Italy shows that people tend to think that expectations are a reflection of reality. Considering that expectations drive investment decisions, expectations can also help shape reality. From an economic perspective, the two are endogenous to the system: they are both the result and the source. To be sure, if expectations differ greatly from reality, the two will eventually be recalibrated. But optimism combined with effective reforms can support the transition from a low-growth model to a high-growth model. Likewise, pessimism can undermine investment and growth. From the perspective of the interaction between reality and expectations, we can better understand the experience of many emerging economies in transitioning to sustained high growth.
Those experiences also highlight a key factor that determines the outcome: leadership. A government’s vision of improving economic performance and inspiring confidence in realizing this vision will greatly increase the chances of the economy moving from a no-growth balance to a sustained high-growth model. This may be the current situation in Italy, with European financial support providing additional impetus.
Whether Italy has actually reached an economic turning point remains to be seen. The government still needs to implement a substantial investment and reform agenda, and many stumbling blocks may arise. However, as the Draghi government seems to have relieved the burden of low expectations and lack of confidence, Italy’s economic prospects are better than before.
