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News Analysis: Italy needs more than ECB measures to lift economy, further reforms needed

English.news.cn   2014-09-05 19:23:35

By Alessandra Cardone

ROME, Sept. 5 (Xinhua) -- The monetary policy's measures announced by the European Central Bank (ECB) on Thursday are unlikely to boost Italy's recovery, if the country does not keep pushing forwards on its path of structural reforms, an analyst said on Friday.

"We should not lull ourselves into believing ECB measures alone will revive Italian economy," Nicola Borri, professor of economics with LUISS-Guido Carli University of Rome, told Xinhua.

"Monetary policy alone cannot solve stagnation. The growth of a country's gross domestic product depends on other things, such as technologies, productivity rate, or the performance of public institutions," Borri explained.

On Thursday, the ECB announced a cut to 0.05 percent from 0.15 percent of its benchmark interest rate, which defines how much banks pay the European Central Bank for credit and, accordingly, what banks would charge firms to borrow money.

It also cut its negative deposit rate to minus 0.2 percent from minus 0.1, to encourage banks to lend money to business instead of leaving their cash with the central bank.

The ECB launched in addition a stimulus program, through which it will purchase a "broad portfolio of simple and transparent asset-backed securities (ABS) and euro-denominated covered bonds issued by monetary financial institutions".

This move was meant to add liquidity to the euro-zone's financial system, and tried to revive lending to companies and families, which could result in more investments, and, ultimately, more growth.

Yet, the analyst doubted these measures would change significantly the behaviour of Italian banks, householders, and businesses.

"Interest rates have been lowered by few decimals, which means savings of few tens of euros for families with a mortgage or a loan. So, a change in their consumption attitude seems unlikely," Borri said.

As for the lack of credit hampering Italy's recovery, the economist suggested a deeper reason behind the "prudence" of banks.

"I believe the main reason why Italy's banks are not loosening lending is that many Italian companies don't have good investment projects," he said.

For example, many firms are now struggling because they contend with foreign companies who have a lower labour cost, which allows them a competitive edge.

"For this reason, I don't expect adding liquidity to our banking system would work as a miracle cure for the weaknesses of Italy's economy and its lack of growth," Borri said.

It was not by chance that ECB chief Mario Draghi restated his appeal to governments to strengthen structural reforms, as he already did in August, the analysts noted.

For Italy, according to Borri, these words would single out three priorities: a broad labour market reform, the streamlining of the justice system, and measures to inject competitiveness in public utilities controlled by local authorities.

These provisions have already been either outlined or partially put into place by Italy's cabinet, yet all three need to be completed, implemented or legislated for.

According to the expert, Italy's government is well aware of how crucial it is to accompany ECB measures with structural reforms in order to ignite recovery. "Yet, we have to wait and see if it will be able to persuade the social actors to digest them," Borri warned.

Would any of the ECB's measures directly help Prime Minister Matteo Renzi's cabinet along this path and clear the way towards reforms, despite a mounting resistance from society?

"I doubt it. I don't think any of the measures will really influence the domestic debate on reforms or ease the cabinet's difficult path," the analyst forecasted.

As an immediate effect, however, Italian export companies would benefit from the euro depreciation resulting from ECB stimulus measures. Not bad news for Italy's sluggish economy, since exports accounted for over 30 percent of GDP last year.

Editor: Shen Qing
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