As Italy faces yet another change of government, outgoing finance minister Pier Carlo Padoan is optimistic that the country is resilient enough to sustain growth and increase productivity in the coming years. He talked to Silvia Pavoni at the G20 meeting in Argentina. 

Pier Carlo Padoan

As The Banker went to press, no government had yet been formed from Italy's general elections on March 4. The Five Star Movement party, riding on an anti-establishment and, in some respects, populist agenda, attracted nearly one-third of the votes – the highest among all parties but not enough to lead the country single-handedly.

A coalition with the right-wing group led by the anti-immigration League party is now on the cards. The other two parties in that coalition are the far-right Fratelli d’Italia (brothers of Italy) and the more moderate Forza Italia, with former prime minister Silvio Berlusconi back as its spiritual leader. He is prohibited from taking public office until 2019 because of a tax fraud conviction.

Populist agenda

Along with initial plans to withdraw from the euro, from which it backed down as it became more mainstream, the Five Star Movement talked about “drastic” cuts to corporate taxes, and the introduction of a minimum monthly income of up to €780 for unemployed people willing to look for work.

Will populism drive Italy’s future economy policy? “To judge by the electoral programme of some parties in the Italian election race, yes, there are certain concerns, but I am confident that once in government, if at all, these parties will take a much more prudent attitude,” outgoing finance minister Pier Carlo Padoan told The Banker at the G20 meeting of finance ministers and central bankers in Buenos Aires, Argentina, in March 2018.

Mr Padoan served under the previous left-leaning government of former prime minister Matteo Renzi, who stepped down in December 2016 after the constitutional referendum he called failed to bring about the changes he hoped for. The finance minister was confirmed in the technocratic government that followed. 

Productivity lag

One of the biggest challenges Italy now faces is maintaining economic growth. Gross domestic product (GDP) has been moderately expanding since 2014 but is expected to edge down to 1.5% this year and 1.3% in 2019, according to the Organisation for Economic Co-operation and Development (OECD).

A stubborn issue blocking further growth is Italy’s low level of productivity. Measured at 2010 prices, Italy underperforms the eurozone average based on GDP produced per hour worked; its productivity is currently the second lowest in the bloc, above Greece, says the OECD.

This is a long march towards increased productivity. I am confident that the country has built enough resilience that will self-sustain itself over the next few years

Pier Carlo Padoan

“Productivity requires more investment in human capital, knowledge capital, fixed capital,” says Mr Padoan. “We’re seeing an acceleration of private investment, we’ll hopefully see an acceleration of public investment too. This is a long haul, a long march towards increased productivity. I am confident that the country has built enough resilience that will self-sustain itself over the next few years.”

Cutting NPLs

Another key issue within Italy is the high level of bank non-performing loans (NPLs), which although declining still comprise about one-quarter of the European total. The positive news is that specialist buyers are beginning to warm to the market. In April, Sweden’s Intrum bought €10.8bn of Intesa Sanpaolo’s NPLs for €3.1bn, pricing the bad loan portfolio at 28.7% of nominal value. This is a considerable improvement on how much Italy’s other major lender, UniCredit, got for its NPLs sales in 2017 – an estimated 13% of nominal value – and from the 23% others have received, according to Reuters.

Mr Padoan believes that a better economy and the state guarantees on securitisation products based on NPLs – or GACS by their Italian acronym and introduced in 2016 following the European Commission decision that they wouldn’t constitute state aid – will continue to sustain disposals.

“[Bad loans] are not low enough yet; they’re going to be low enough, however, in a relatively short period of time because I’ve seen a change in the dynamics of NPLs,” says Mr Padoan. “Banks are happier to get rid of those NPLs that have been laying in their balance sheet for a long time and also the environment has improved: there’s more growth, microeconomic conditions are better and there is more use of state guarantees such as the GACS.”

Conditions do seem to be improving – but whoever replaces Mr Padoan in the next government will be treading carefully, and keeping a prudent attitude in order to successfully navigate a still complex environment.

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