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The first estimates on the Italian GDP trend come out and, predictably, they are terrible. The epidemic and the consequent lock down of the country are hitting production activity hard, consequently employment and incomes are falling, investments are reduced, many companies are closing. In recent days, Goldman Sachs had sounded the alarm with an 11 percent decrease forecast for the whole of this year. Today is Prometeia to cast a shadow of gloomy pessimism on the performance of the national economy. The Bologna study center, even on the hypothesis that it could prove optimistic of a “slow and selective reduction of production blocks starting from the beginning of May”, foresees a fall in GDP of 6.5 percent this year and a gradual recovery starting from since the autumn which would lead to a 3.6% rebound in 2021. The most difficult months will be those of the first half of 2020 when the decrease could reach 10%. The recession will hit the various sectors with varying intensity, will affect tourism and transport above all, except manufacturing and within the latter its production segments in a diversified manner. Finally, The European house-Ambrosetti also foresees a contraction in a gap between -3.5% and -11.5%. This is the scenario.
However, Prometeia and Ambrosetti photograph a moving situation. Forecasts have a relative degree of reliability at this stage and things could turn out to be better but also worse. Perhaps it is also useless to repeat it, Italy has reached the tragic appointment with Coronavirus as a runner already in trouble, having two quarters of negative growth behind it and the prospect of a plus 0.2 percent in 2020, a fairly public deficit under control but a 135 percent GDP debt ratio on the rise. Hurricane Covid-19 now puts us in the least desirable condition of all European countries. Italy does not have sufficient fiscal space to support the increase in healthcare spending and reflate the economy. Others, like Germany and France in particular, but even Spain, with a debt of less than 100 percent of GDP, have it. The country, this is the truth, did not take advantage of the phases in which the cows were fat to put hay on the farm and now it pays the consequences.
In order to cope with the shock wave caused by the virus, Italy needs two conditions: a level of interest rates on BTPs low enough to induce the markets to consider the Italian public debt sustainable and an injection of capital to low cost provided by some European institution. For this reason, the huge gaffe committed by Christine Lagarde two weeks ago he even brought down the President of the Republic, Sergio Mattarella. This is also why Prime Minister Conte and Minister Gualtieri, with the help of Madrid and Paris, are desperately trying to convince, so far with little success, the European partners to accept that the Mes (European Stability Mechanism) launches a Corona Bond issue, essentially Eurobonds guaranteed by all countries but destined to financially support those plus the difficulties. Basically a form of debt mutualisation.
So far the first condition has been met. The ECB has changed course since the first moves and Madame Lagarde has revealed herself for what she is, a dove. The massive purchases of Italian government bonds by Eurotower have already led to a significant reverse of the spread that seems destined to continue. But the fulfillment of the second condition has hit the ice wall of hawks, those northern European countries led by Germany that do not want to pay for the debt of others. Conte and Spanish Prime Minister Sanchez have set their foot on Wednesday’s summit of heads of state and any decision has been postponed. But the wall of the Northern European opposition is unlikely to fall. More likely that a gap will be opened, the true way a compromise that could also be honorable for Italy: the MES widens the purse strings but who receives a loan must be subjected to a conditionality attenuated compared to that originally foreseen.
