Blog Post

To save the Italian economy from the Coronavirus, Rome prescribes a stimulus

Faced with a difficult prognosis, the Italian government has prescribed a three-step strategy to treat the worse economic symptoms of the Coronavirus. The medicine is money and the dosage is €4.5 billion

By: and Date: March 3, 2020 Topic: Global economy and trade

On February 21, Italian authorities announced that a 38-year-old Italian man from the town of Codogno, 60 km southeast of Milan, had tested positive for the virus. Within ten days, more than 1,800 people had caught the disease, of whom around 50 had died.

As the number of cases increased, so did the concern about the economic repercussions for the country. But these will mainly depend on how long the current situation will last, a factor that no one can reasonably predict. So what’s at stake? And what kind of strategy has the Italian government adopted in the face of this situation?

What’s at stake

The outbreak has primarily affected the Northern part of the country and most notably ten towns in Lombardy and one in Veneto. Northern regions represent the backbone of the Italian economy, accounting for around half of its GDP, tax revenues and investment, and for 65 per cent of its exports (Table 1).

Table 1. Macroeconomic fundamentals of Italy’s main Northern regions

GDP

(EUR billion)

2018

Tax revenues

(EUR billion)

2017

Investment

(EUR billion)

2017

Export

(EUR billion)

2018

Lombardy 390,3 123.2 64,8 127,3
Veneto 163,2 48,4 29,3 63,6
Emilia Romagna 161,7 50,1 29,6 63,8
Piemonte 137,5 44,4 28,6 48,3
Group total 852,7 266,1 152,3 303
% of Italy 48,2% 47,8% 50,5% 65%

 

Source: Bruegel on Ufficio Studi CGIA.

If the coronavirus emergency were to spread in all these regions and last a few months, the economic impact would be substantial. For example, since the start of the outbreak around 6,000 metalworkers in Lombardy have been affected by production stoppages and reduced hours. While the short-term risks of such situations can be faced by the government through different measures such as a scale-up of the national redundancy fund, Cassa lntegrazione Guadagni, there are also longer-term risks to be considered. Lombardy, Veneto and Emilia Romagna are deeply integrated into European value chains and play an important role in the German automotive industry value chain, to which they supply a number of components. A prolonged interruption of production could push German and other buyers to find alternative suppliers – turning a temporary fall in industrial production into a permanent loss of industrial stock. This would thus represent an existential risk to the Italian manufacturing sector, which has already lost a quarter of its stock as a result of the 2008 crisis.

Like the virus itself, economic impacts can also quickly spread from the outbreak’s epicentres to the rest of the country. Take the example of tourism. The reputational damage suffered by Italy amid this situation is severe, and it is already being reflected by a sharp downturn in the tourism sector, which represents 13 per cent of Italy’s GDP and 15 per cent of the country’s total employment. A mounting number of international tourists are already avoiding Italy (Northern and Southern regions alike), to the extent of inducing several airlines to cancel their (empty) flights to the country. The Italian confederation of tourism enterprises expects 22 million fewer visitors over the next trimester, implying a potential economic cost of around EUR 2.7 billion.

The Italian government has a three-step strategy

First, on February 25, the government approved a package worth EUR 900 million to support the 11 worst-impacted municipalities. Measures include i) The suspension of mortgages, as well as tax payments and social security contributions; ii) Additional funds for the Cassa lntegrazione Guadagni; iii) The provision of financial aid of EUR 1,500 for autonomous workers; iv) An increase in guarantee funds for businesses.

Second, this week, the government will adopt an additional package, this time worth EUR 3.6 billion to support the country’s overall economy. This would entail a rise in the official deficit target for 2020 of 0.2%. Measures but might include: i) Tax credits for companies that reported a 25% drop in revenues; ii) Tax cuts for companies, notably in the tourism and logistics sectors; iii) Additional funds for the health service; iv) Additional funds for the Cassa Integrazione Guadagni. While announcing the forthcoming package, Italian Minister of Economy Gualtieri noted that the EUR 3.6 billion are compatible with the flexibility provided by the Stability Pact, given that we are in the presence of objective ‘exceptional circumstances’.

Third, the government intends to present a structural package of measures to relaunch investments in the country. The Italian government also outlined that, should the coronavirus outbreak escalate further or be prolonged in time, it will promote a joint action at the EU level, notably aimed at seeking a fiscal stimulus allowing the government to support the economy by reducing taxes and investing more.

The economic impact of coronavirus in Italy will depend on the duration and the extent of the contagion in the country and the rest of the world. This will determine – from both demand and supply sides – the order of magnitude of economic damages for Italy. Should the situation not escalate further, Italy is likely to only ask for a hike of 0.2% of its official deficit target for 2020. But should the situation escalate, a different – and much more difficult – economic and fiscal policy discussions are likely to dominate the springtime in Brussels.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

Nov
9
11:00

Phasing out COVID-19 emergency support programmes: effects on productivity and financial stability

How can European countries phase out the COVID-19 support measures without having a negative impact on productivity and financial stability?

Speakers: Maria Demertzis and Laurie Mayers Topic: Macroeconomic policy
Read article More by this author
 

Blog Post

European governance

Pandemic prevention: avoiding another cycle of ‘panic and neglect’

Agreement is needed at international level on mechanisms to ensure better preparedness for the next pandemic.

By: Anne Bucher Topic: European governance, Global economy and trade Date: October 7, 2021
Read article More on this topic More by this author
 

Opinion

Letter: Declining investment may explain why rates are low

Perhaps an analysis of the causes of the declining investment rate would bring us closer to explaining why real interest rates are so low.

By: Marek Dabrowski Topic: Macroeconomic policy Date: October 1, 2021
Read article More on this topic More by this author
 

Opinion

What Evergrande signals about China's economic future

Under Xi Jinping's new economic agenda 'common prosperity', China is cracking down on indebted real estate developers like Evergrande.

By: Alicia García-Herrero Topic: Global economy and trade Date: September 30, 2021
Read article More on this topic More by this author
 

Blog Post

Monetary arithmetic and inflation risk

Between 2007 and 2020, the balance sheets of the European Central Bank, the Bank of Japan, and the Fed have all increased about sevenfold. But inflation stayed low throughout the 2010s. This was possible due to decreasing money velocity and the money multiplier. However, a continuation of asset purchasing programs by central banks involves the risk of higher inflation and fiscal dominance.

By: Marek Dabrowski Topic: Macroeconomic policy Date: September 28, 2021
Read article More on this topic More by this author
 

Opinion

The pandemic’s uncertain impact on productivity

The pandemic has certainly permanently affected our way of working. Whether this is for the better remains to be seen.

By: Maria Demertzis Topic: Macroeconomic policy Date: September 28, 2021
Read article Download PDF
 

External Publication

Building the Road to Greener Pastures

How the G20 can support the recovery with sustainable local infrastructure investment.

By: Mia Hoffmann, Ben McWilliams and Niclas Poitiers Topic: Global economy and trade, Testimonies Date: July 15, 2021
Read about event
 

Past Event

Past Event

Financing for Pandemic Preparedness and Response

How can we better prepare for future pandemics? In this event, co-hosted by the Center for Global Development and Bruegel think tanks, speakers will present "A Global Deal for Our Pandemic Age", a report of the G20 High Level Independent Panel on Financing the Global Commons for Pandemic Preparedness and Response.

Speakers: Masood Ahmed, Victor J. Dzau, Amanda Glassman and Lawrence H. Summers Topic: Banking and capital markets, Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 14, 2021
Read article More on this topic
 

Blog Post

Fair vaccine access is a goal Europe cannot afford to miss – July update

European countries must do more to tackle the vaccine uptake gap. Vaccination data should be published at the maximum granularity level so researchers and local decision-makers can monitor progress.

By: Lionel Guetta-Jeanrenaud and Mario Mariniello Topic: Macroeconomic policy Date: July 14, 2021
Read article More on this topic
 

External Publication

A Global Deal for Our Pandemic Age

Report of the G20 High Level Independent Panel on Financing the Global Commons for Pandemic Preparedness and Response.

By: Tharman Shanmugaratnam, Lawrence H. Summers, Ngozi Okonjo-Iweala, Ana Botin, Mohamed El-Erian, Jacob Frenkel, Rebeca Grynspan, Naoko Ishii, Michael Kremer, Kiran Mazumdar-Shaw, Luis Alberto Moreno, Lucrezia Reichlin, John-Arne Røttingen, Vera Songwe, Mark Suzman, Tidjane Thiam, Jean-Claude Trichet, Ngaire Woods, ZHU Min, Masood Ahmed, Guntram B. Wolff, Victor J. Dzau and Jeremy Farrar Topic: Global economy and trade Date: July 9, 2021
Read article Download PDF More on this topic
 

Policy Contribution

Commercialisation contracts: European support for low-carbon technology deployment

To cut the cost of decarbonisation significantly, the best solution would be to provide investors with a predictable carbon price that corresponds to the envisaged decarbonisation pathway.

By: Ben McWilliams and Georg Zachmann Topic: Green economy Date: July 1, 2021
Read article More on this topic More by this author
 

Opinion

What to expect from the ECB’s monetary policy strategy review?

Emphasis will be placed on greening monetary policy and clarifying the ECB's price stability objective, but is this enough?

By: Maria Demertzis Topic: Macroeconomic policy Date: June 23, 2021
Load more posts