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(Re)building Italian resilience

The Italian government has launched a €191.5bn recovery plan designed to boost the country’s economic resilience and also set it on a path to a more sustainable and digitally-enabled future.

The National Recovery and Resilience Plan (PNRR), which was officially endorsed by the European Commission at the end of June, was formed in the wake of the Covid-19 pandemic, which highlighted how poorly Italy ranked alongside its European neighbours in terms of macroeconomic resilience.

The pandemic has severely tested the resilience of all countries. According to the Swiss Re Macroeconomic Resilience Index – a periodically updated indicator that measures the resilience level of 31 countries in the world – in 2020 global macro resilience was reduced by 18% compared to the previous year.

Italy was one of the worst-performing European countries in Swiss Re’s Macroeconomic Resilience Index, ranking 23rd, ahead of only Greece.

According to the World Economic Forum, a country’s resilience is largely determined by characteristics such as an advanced digital economy, robust social safety nets and a strong health system. Unfortunately, Italy still shows weaknesses in crucial areas like investments in research and development, education and inclusion, along with a taxation system that needs to be more progressive.

The most advanced economies have proven to be more resilient than emerging markets, thanks to higher levels of investment in health and more resources deployed to mitigate the crisis. However, the massive fiscal and monetary stimulus deployed to mitigate the downturn caused by the pandemic has also been one of the main drivers of a reduction in overall global resilience.

The stimulus drained advanced economies’ fiscal buffer capacity by more than half, which in turn led to a more than 20% decline in those economies’ overall macro resilience in 2020. Those advanced economies with higher levels of resilience pre-pandemic, such as Switzerland and Norway, saw stronger growth performance during the last year’s global downturn than others with lower levels of resilience before the crisis, such as Greece and Italy.

According to Swiss Re analysts, 2021 will see a recovery in global macroeconomic resilience but not a full return to pre-pandemic levels. Central banks will remain in accommodative territory to ensure the massive government debt loads that have been accumulated during the pandemic remain sustainable. This will leave the authorities, especially in advanced economies, with very little space to manage further monetary policies should another shock occur.

After the strong reaction experienced in 2021, growth will likely slow again in 2022 and even the more resilient economies will be vulnerable as government debt levels remain high and fiscal incentives will not be so massive.

The priority to drive long-term growth and restore macroeconomic resilience must therefore be to plan deeper structural reforms. This will require investment and commitment to facilitate change across many different areas, including the building of sustainable infrastructure, a broader rollout of the digital economy and the transition to low-carbon energy.

Governments also need to act to reduce inequality and build human capital through education and training. Labour markets must become more efficient so that more people have the chance to participate in the workforce and make up for personal losses from the crisis.

These objectives are also the drivers of the PNRR in Italy, which is part of the Next Generation EU programme. The Italian plan is based around three strategic axes shared at European level: digitalisation and innovation; ecological transition; and social inclusion.

This is an intervention that intends to repair the economic and social damage of the pandemic crisis, help solve the structural weaknesses of the Italian economy, and accompany the country on a path of ecological and environmental transition. The Italian government estimates that in 2026, GDP will be 3.6 percentage points higher than in a base scenario that does not include the plan. Hopefully, this will make Italy more resilient to possible future crises.

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