(Finance) – To face the current challenges – the double digital and climate transition, the deterioration of the geopolitical scenario, demographic and migratory pressures, the fragmentation of global trade – it is necessary to “build an economy capable of growing, innovating and generating well-being widespread. No Member State can do it alone.” This is the appeal launched by governor of the Bank of Italy Fabio Panetta in his speech at XX Spain-Italy Dialogue Forum in Barcelona. The priority objective is, for Panetta, “to place innovation at the center of economic policies as a driver of productivity and growth, mobilizing public and private resources for this purpose”.
“It’s essential – he explained Panetta – coordinated action at European level: a productivitycompact that mobilizes public and private investments in strategic common goods. This initiative is not just a response to the need to fill our gaps, but a perspective for the future. It means strengthening technological sovereignty, creating jobs, improving the quality of life of citizens and protecting fundamental values such as freedom and pluralism. To achieve these goals is crucial introduce a risk-free European bond, complete the Banking Union, develop a European capital market able to finance high-risk innovative projects. We must also create an economic environment that encourages entrepreneurship and innovation, overcoming the regulatory and administrative rigidities that hinder our development potential.”
Productivity compact – Panetta’s proposal is to “create a common budgetary capacity to finance public goods”.
“It is important to be clear: this proposal – explained the governor – does not imply the creation of a fiscal union nor does it require a European finance minister or mechanisms for systematic transfers between countries. Instead, it is about establishing a common spending program to finance investments essential for all European citizens, creating a productivity compact at continental level. To paraphrase Keynes, the objective is not to do better or worse what the Member States already do, but to do what they do not do. it is useful to consider an example numerical If it were decided to finance 25 percent of an investment plan of 800 billion per year for six years, the common European debt would reach 6 percent of EU GDP in 2030. Including NGEU bonds and other managed programs. by the European Commission, it would reach 10 percent of GDP. This increase in liabilities at central level would be limited and aimed exclusively at increasing the productivity of the European economy; it would limit the need for investment spending by member states, which would thus be able to reduce their public debt more quickly. The creation of a liquid secondary market would make it possible to reduce the returns of European securities, currently penalized by the low liquidity of trade and the absence of adequate derivative instruments to manage market risks. According to our estimates, overcoming these critical issues could lower interest rates on European securities by more than 20 basis points. Regular bond issues by the EU would also make available a risk-free European bond, which is indispensable for the development of a European capital market. The path just described will have to take into account three fundamental needs: rationalizing the resources already allocated to community programmes; commit Member States with high debt to improve their public finances, in order to avoid an excessive increase in the Union’s overall debt; guarantee transparent management of common projects, ensuring that resources are used to increase productivity and fully accounting for the choices made”.
A European capital market for innovation – “Greater financial integration – said Panetta – would make the euro area more attractive for both domestic and foreign investors. The European economy has been recording a balance of payments surplus for years: it therefore generates savings greater than internal investments, employing them partly abroad. Before the pandemic, domestic resources invested outside the area amounted on average to over 300 billion euros per year, almost 3 percent of GDP. If these resources had been allocated to domestic business initiatives, productive investments on the continent would be increased by a fifth.
A single capital market would improve the allocation of savings. It would also strengthen financial flows between member countries, offering European families, businesses and intermediaries better investment diversification opportunities. This would allow them to mitigate the impact of local shocks and participate in projects with higher risks and higher returns. Currently the financial sector allows European investors to absorb only a quarter of local shocks to GDP, compared to three quarters in the United States”. Necessary preconditions for creating a single capital market are – according to Panetta – “the introduction of a European security risk-free” and the “completion of the Banking Union”. But that is not enough. “We must not forget – added the governor – the importance of defining a Consolidated Law on
European finance, to strengthen centralized supervision and to standardize corporate crisis management mechanisms”.
Introduction of a risk-free European public bond – “A common security – underlined the governor of Bank of Italy – is essential for the functioning of developed capital markets. The possibility of trading a risk-free benchmark would facilitate the determination of the price of financial products such as corporate bonds and derivatives, stimulating their development Furthermore, it would constitute a form of financial guarantee that can be used in every country and in all market segments, facilitating collateralized interbank trade and improving the ability to diversify risks for intermediaries. It would also attract foreign investments, strengthening the international role of the euro.
Completing the Banking Union – “The incompleteness of the Banking Union – said Panetta – forces the banks
Europeans to operate mainly in national markets. The establishment of the Single Supervisory Mechanism and the Single Resolution Mechanism represented an important step forward, but was not enough to create a fully integrated European banking market. A sequential, small-step approach was followed, which didn’t work. Banks play a crucial role in the main capital markets: from savings management to the underwriting and placement of bonds and shares, from stock market listing operations to financial consultancy and market-making. Their full operation across the euro area is indispensable for an integrated capital market.”