In an interview with Il Sole 24 Ore from his house in Bologna, the former European Commission chief Romano Prodi called for caution before assessing the new policies of the new US administration. But he also expressed concerns about the impact of possible protectionism on Europe.
Asked about Italy’s historic delalys in attacking its structural problems, he said the measures to be taken are well known -- starting from improvements in productivity, a “staggering problem,” especially in the service sector, and including research for Industry 4.0 and technical education -- but need to be implemented.
Speaking of the health of the banking system, Prodi said Italy is paying the consequences of a European Supervision that “focuses on credit risk, but ignores market risk,” as well as of Italy’s own lack of action, including the “incomprehensible” late intervention in the crisis of Tuscan lender Monte dei Paschi di Siena.
MERLI: Professor Prodi, analysts say 2017 could be a decisive year for Europe, after Brexit and the rise of populist and euro-skeptic movements in several countries.
PRODI: For a decade people have said this would be a decisive year. It seems to me that we are instead making steps back, without taking any decision. I rather see a continuous wavering, in line with 2016 which, based on what happened last year, doesn’t make me happy.
MERLI: But in 2017 there will be important elections in France and Germany, and Brexit talks will start.
PRODI: The French and German elections are of course very important but, after the vote, both countries will be in a not much different situation than today. I don’t believe there will be elections in Italy. And I don’t see a breakup of the system, which would worsen the impact of Brexit. Great Britain remains a case apart. The British have always been uncertain on which side of the Atlantic to be. We will see what Trump will propose, amid warnings and provocations.
Instead, Europe’s slow decision-making is already visible: true negotiations will begin in April, but the timing and terms remain unknown. The damages from Europe’s slow decision-making process could have been limited in a predictable global scenario, but the presence of important changes around the world complicates the situation. The impossibility of taking important decisions could cause serious damage.
MERLI: The euro area’s economy is however recovering, although, according to European Central Bank President Mario Draghi, the main risks come from the field of politics.
PRODI: The latest reports forecast a growth of 1.5%, which is not so bad. It’s a bit better than previous forecasts, thanks to the performance at end 2016. I would say that the main unknowns are political uncertainty and global trade. The latter, for the first time in many years, has grown less than global GDP. In this scenario, Trump was elected and said he wants to impose duties on China and other countries. But since China is part of the WTO, repercussions would be on a global scale. Europe itself could be hit. The appointment as US foreign trade representative of a person who in the past had backed protectionist positions is a concern to me. But despite recent remarks, it will take a few months to know the trade policy of the new US administration. This is part of the uncertainty mentioned by Draghi.
MERLI: In this scenario, Italy remains behind in terms of growth. Il Sole 24 Ore-ItalyEurope24 is working on an investigative report on Italy’s structural problems. The country’s rating has been downgraded.
PRODI: In 2017, Italy’s economy could grow by close to 1%, but it remains the last among large economies. As for ratings agencies, I have noted for years the superficiality of their analyses. Their decisions don’t have huge consequences, but are certainly negative, especially in terms of image.
MERLI: How can the economy recover?
PRODI: There are many measures. The problem of productivity is striking. A lot has been said about the importance of Industry 4.0 and innovation is of primary importance, but so far it has mostly remained on paper. I have long insisted on two other essential issues.
Firstly, industry is not enough. Productivity also needs services, which are the true weakness of our economy. There is very slow progress that could be boosted by reforming bureaucracy. Among other things, 300,000-400,000 public jobs have been cut and salaries have not been raised, but public accounts do not improve. The first reason of course is slow growth, but there is also the problem that the several spending review programs have not been completed and other expenditure has increased.
MERLI: And the second area of your proposed measures?
PRODI: Research targeted to develop Industry 4.0. There have been proposals to recreate the German Fraunhofer centers and bring together universities and companies, but we are still waiting. I have fought for 20 years for incentives for technical education: we once had experts, today we also have engineers. Our industry lacks these figures. Perhaps, to convince the youth to choose these careers, we should make a TV series on skilled industry workers, not only on Carabinieri police. Unfortunately, results on this front are scarce.
Finally, the government must adopt a policy on foreign investment in Italy and support Italian companies who invest abroad. For example, it must help remove the hurdles that prevent Fincantieri from buying its French peer and create a European leader, in a sector where we can still play a role.
MERLI: The other big unknown concerns the health of banks. The Sole 24 Ore-ItalyEurope24 has highlighted the close monitoring by ECB’s Supervision of Italian banks’ bad loans but not of the “toxic” assets held by French and German banks.
PRODI: I think that Il Sole 24 Ore-ItalyEurope24’s incessant campaign on supervision is correct. There has always been a big focus on credit risks, while market risks are ignored. Non-performing loans are important, but they should not be overestimated. Market risk is also important, also because we don’t know how much these derivatives are worth. This is an approach that damages Italy and is another example of Europe’s slow decisional progress. If analytical criteria are not balanced, we don’t have an objective analysis of the health conditions of European banks. Italy pays the consequences of this.
MERLI: After months of uncertainty, the public rescue of Monte dei Paschi has arrived.
PRODI: We clearly have responsibilities in the banking situation. It’s impossible to understand why we waited so long before taking a decision on the MPS crisis. Each delay has worsened its problems. There have been deposit outflows that could have been resolved by simply making a clear reassurance, which included a public intervention. It was already evident months ago that this was indispensable and Europe would accept it. When problems are so evident, it’s necessary to act. Look at what the US has done in the case of the automotive and banking sectors, without damaging the taxpayers. Politics is flexibility and when there is an emergency it makes no sense to hide behind academic positions. If the patient is at risk, it needs urgent surgery.
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