Lorenzo Codogno is an economist, professor at the London School of Economics, and Visiting Professor at the College of Europe in Bruges. He has served as the director general of the Treasury Department of the Italian Ministry of Economy and chairman of the Economic Policy Committee of the European Union, as well as managing director for Bank of America.
“Investments alone are not enough, you need reforms. And reforms alone are not enough, it takes investments.” As Europe grapples with the energy crisis and rising costs, the mission of the Next Generation EU Covid-19 recovery fund becomes even more important than ever. According to Lorenzo Codogno, an economist, internationally renowned analyst, and professor at the London School of Economics, this mission can only be accomplished by making sure both sides of the equation are not forgotten.
Italy and Europe are experiencing a delicate historical moment where the impact of rising energy prices linked to the war in Ukraine is compounded by high inflation. What should we expect in the coming months?
“It is a very complicated moment. On the one hand we have the energy crisis, the cost-of-living crisis; on the other hand, we have resilience factors that continue to be an important support. We have households that will see their real incomes fall, with an impact on household consumption, and we have businesses that will see their profits decline, forcing them to cut investments. Are there reasons for optimism? I would say yes. We have had a very strong increase in household and business savings. If we look at liquidity in bank deposits, it is at very high levels, which means that many households — not all, of course – and many businesses are in a position to withstand a sharp temporary decline in income and profits because they can rely on their savings.”
Will these reserves be sufficient to keep investment levels high, both for businesses and governments?
“Investment is holding up, both public and private, and this seems to be a similar reaction to what happened during the oil shock of the 1970s. Businesses are investing in the ecological transition, to cope with climate change, and in changing their production processes. They are also investing in technology to reduce costs.
We’re talking about infrastructure here, not just physical infrastructure, not just roads, rail lines, etc., but also intangible infrastructure. It’s clear that each of these aspects is important. In economics we know that investment is a bit of a bet on the future, consequently the more investment there is today, the more this creates the conditions for growth in the future. But investment alone is not enough, investment must be accompanied by reforms because the long-term potential of the economy is determined by technological growth and innovation.”
In this framework, how important are the National Resilience and Recovery Plan (NRRP) funds?
“The NRRP is very important. This is a lifesaver that was thrown to Italy during the pandemic and is only now beginning to have an impact. This emergency lifesaver is very important because it could allow Italy — if fully exploited — to increase not only short-term growth because it is a demand stimulus, but also to increase long-term growth. This can only happen if investments are accompanied by major structural reforms. I am very convinced the incoming government after the September 25 election will not miss a historic, important opportunity like that offered by the Next Generation EU Covid-19 recovery fund, and so I think the reform agenda will be carried through.”
Energy price hikes and inflation negatively affect public procurement costs. Do major works need to be refinanced?
“There is a whole supply chain that is on hold. Then there is the problem of prices in public procurement because it is clear that by increasing costs significantly, prices are no longer in line with the market. It’s clear that some adjustments are necessary, and so we will have to find ways to implement them, but I don’t think it will be a problem to negotiate these adjustments with the European Commission.
The issue with Next Generation EU, in my view, is to maintain the overall framework, which means a combination of structural reforms with public investments that can lift growth again.”
Will the spread shield put up by the ECB be enough to stave off financial market speculation on Italian debt?
“The ECB has adopted the anti-spread shield and this is now fully operational. However, we do not know the details of this instrument, and we will probably never know them. After all, the ECB adopts this basic ambiguity so that financial markets are not tempted to bet against this shield in the immediate term. I have a feeling that at some point, if there are interest rate tensions — especially for countries like Italy — the financial markets will test the commitment the ECB has made to protect monetary policy. When the financial markets test this shield, we will see whether it is really effective or not. For now, the announcement of the shield alone has calmed the financial markets.”