Draghi’s speech at Rimini Meeting

Filomena Armentano Home inglese, News inglese

Incontro inaugurale | 18-08-2020

12 years ago, the financial crisis caused the greatest economic destruction we had ever seen in peacetime. We then experienced a second recession in Europe, and with it a further loss of employment. The euro crisis then reared its head, followed by the pressing threat of depression and deflation. We overcame all of these trials.

Just as confidence had returned, and the economic recovery was starting to take hold, we were hit even harder by the coronavirus outbreak. The pandemic has not only caused economic damage; it threatens to undermine the fabric of our society as we know it. It spreads uncertainty, destroys employment, paralyses consumption and investment.

After such a succession of crises, the subsidies being provided in many countries are a first form of support by society for those who have been hit hardest, and in particular for those who have tried so often to regain their footing in the world. The subsidies will enable them to survive, to start again. But we must do even more to help the young: after all, the subsidies will end but they will be left with a lack of professional qualifications and experience, compromising both their freedom of choice and their earning potential later in life.

Society as a whole cannot accept a world without hope. Instead, gathering our collective energies and sense of purpose, we must seek the path of reconstruction.

In our present circumstances, this path requires pragmatism. We do not know when a vaccine will be discovered or what our world will look like then. Opinions are divided between those who believe that everything will return to the way it was before, and those who see this crisis as the beginning of a period of profound change. The reality will likely be somewhere in between: in some sectors, not much will change; in others, existing technologies can and will be rapidly adapted. Still other sectors will expand and grow as they adjust to the new patterns of demand and behaviours produced by the pandemic. But for others, activity is unlikely to return to the same levels that prevailed before the pandemic.

We must accept the inevitability of change with realism and, at least until a remedy is found, we must adapt our behaviours and policies. But we must not renounce our principles. Economic policy must not compound the uncertainty already being caused by the pandemic and rapid change. Otherwise we will end up being controlled by uncertainty instead of us controlling it. We will lose our way.

The words of Reinhold Niebuhr's “serenity prayer” come to mind, asking the Lord:

Give me the serenity to accept the things I cannot change,

The courage to change the things I can change,

And the wisdom to know the difference.

So my message to you today is not a lesson in economic policy. It is a call of a more ethical nature to face together the challenges of reconstruction and to re-affirm the values and objectives on which we want to rebuild our societies and economies, in Italy and in Europe.

In the second quarter of 2020, the economy contracted at a rate comparable to that experienced by large countries during World War II. Our freedom of movement has been curtailed; we have sacrificed many aspects of our human interactions, both physical and psychological; entire sectors of the economy have been locked down or put out of business. We have seen a dramatic increase in the numbers of people unable to work, which early estimates suggest will be difficult to reverse quickly, and we have been forced to close schools and other places of learning, interrupting the professional and education paths of many. All of this has deepened inequalities.

We have not experienced a destruction of physical capital on a level comparable with the war. But many today fear a destruction of human capital unseen since that great conflict.

Faced with this daunting prospect, governments – supported by central banks – have responded with extraordinary measures to support employment and income. Tax payments have been suspended or deferred. The banking sector has been mobilised to continue to provide credit to businesses and families. As a consequence, fiscal deficits and public debt have grown to levels previously unseen in peacetime.

Leaving aside the national agenda of individual governments, the direction of this common response has been correct. And to facilitate it, many of the rules under which our economies operated have been suspended pragmatically, as dictated by changing circumstances.

The words of John Maynard Keynes, the most influential economist of the 20th century, remind us that “when facts change, I change my mind. What do you do, sir?”. The mobilisation of all available resources to protect the workers and businesses that make up the fabric of our economies has prevented an inevitable recession from turning into a prolonged depression.

But the state of emergency and the measures it has justified will not last forever. Now is the time to demonstrate wisdom in choosing the future we want to build.

In particular, the fact that flexibility and pragmatism are necessary to govern today should not lead us to discard the principles on which we have hitherto relied. The sudden abandonment of any national or international frame of reference leads to disorientation.

In the aftermath of the Great Financial Crisis, we already saw the erosion of principles that were previously considered fundamental: the jurisdiction of the WTO, and with it the framework of multilateralism that had governed international relations since the end of World War II, was called into question by the countries that had designed it – the United States – and those that had benefited most from it: China. But never by Europe, which through its own social protection system had mitigated some of the most severe and unjust consequences of globalisation.

We also witnessed the impossibility of reaching a global climate agreement and its consequences for global warming. Here in Europe, we saw criticism of the European construct morphing into growing scepticism, especially after the euro area sovereign debt crisis, towards some of the rules considered to be essential for its functioning: those of the stability pact, of the single market, of competition and state aid – all of which were subsequently suspended or relaxed following the pandemic emergency.

The inadequacy of some of these arrangements had long since become evident. But out of inertia, timidity, or prioritisation of short-term and vested interests, they were not swiftly corrected, as had been done – at least partially – for the financial sector. Instead, they were allowed to develop into a populist rallying cry and an indiscriminate protest against the existing order.

This uncertainty about our frame of reference – which is usual when an old order is being challenged and a new order is yet to emerge – was then amplified by the pandemic. Social distancing is a necessity and a collective responsibility. But it is fundamentally unnatural for societies that thrive on exchange, interpersonal communication and sharing. Our lack of visibility about when a vaccine will be found, and thus when we will be able to return to more normal relations, is profoundly unsettling.

We must now adapt, rather than abandoning the principles that have guided us in the past. We must affirm our adhesion to Europe and its rules of responsibility, but also recognise our common interdependence and solidarity; we must recommit to multilateralism and a global rule of law. The future need not be without reference points – which would lead, as it did in earlier decades like the 1970s, to erratic and less effective policies, to less internal and external security, to higher unemployment – if there is deep reform in the present. But we need to reflect on this immediately.

We should take inspiration from those who were involved in rebuilding the world, Europe and Italy after World War II. Think, for example, of those leaders who, inspired by Keynes, met in Bretton Woods in 1944 to create the International Monetary Fund, or Alcide de Gasperi, who in 1943 set out his vision for a future Italian democracy, as well as the many others, in Italy, Europe and across the world, who were thinking about and preparing for the period after the war. Their reflections on the future began well before the war ended, and produced the fundamental principles of the world and European orders that we have known ever since. It is likely that our European rules will not be reactivated for a long time and certainly not in their current form. So our search for a new sense of direction must, in the same way, entail immediate reflection on their future shape.

Indeed, precisely because economic policy today is more pragmatic and leaders can exercise more discretion, we need to be very clear about the objectives we set ourselves.

A framework in which long-term objectives are intimately connected with short-term ones is essential to restore certainty to households and businesses. But it will inevitably be accompanied by high stocks of debt for a long time. This rise in debt will be sustainable – that is, it will continue to be funded in the future by European institutions, by savers, by markets – only if it is used for productive purposes: investment in human capital, in crucial infrastructure for production, in research. In that case, it will be seen as “good” debt.

If, however, debt is used for unproductive purposes, it will be seen as “bad” debt and its sustainability will be eroded. Low interest rates are not in themselves a guarantee of sustainability: the perception of the quality of the debt incurred is just as important. And the more that perception deteriorates, the more uncertain our framework of references will become, which would jeopardise employment, investment and consumption.

The return to growth – of a type that respects the environment and does not demean the individual – has likewise become an absolute imperative. This is vital to ensure that the economic policies being pursued today are sustainable; to provide income security, especially for the poorest; to strengthen a social cohesion made fragile by the experience of the pandemic and the difficulties that exiting the recession will create in months to come; and to build a future whose contours are already visible to our societies today.

This objective is challenging, but it is not unattainable if we succeed in dispelling the uncertainty hanging over our countries today. We are now seeing economic activity bounce back as our economies reopen. The collapse in GDP, which in some countries has fallen to the levels of the mid-1990s, in international trade, in domestic consumption (the household saving rate in the euro area has reached 17%, up from 13% at the end of last year), in private investment – all will abate. But a real recovery in consumption and investment will occur only once uncertainty starts to dissipate and once economic policies are in place that are both effective in providing support to families and businesses and credible, because they are sustainable over time.

The return to growth and the sustainability of economic policies are also essential to respond to the changing preferences of our societies, starting with health systems, where efficiency is now measured in terms of our state of readiness for mass disasters on the scale we just experienced. The protection of the environment, and the adaptation of our industries and lifestyles, is considered by 75% of people in 16 major countries to be the priority for governments, after what can be considered the greatest public health disaster of our times. Digitalisation has been imposed by the change in our working patterns and accelerated by the pandemic, but is destined to remain a permanent feature of our societies: in the United States, it is estimated that a fifth of office days have now permanently shifted to homes.

However, there is a sector which is critical for growth and therefore for all the transformations I have just listed, and where a long-term vision must be married with immediate action: education and, more generally, investment in young people.

This has always been true. But the current situation makes a massive investment of intellectual and financial resources in this area all the more urgent. Active participation in the society of the future will require today’s youth to dispose of an even greater capacity for discernment and adaptation. If we look at the cultures and nations that have best managed continuous uncertainty and the need for change, they have all awarded education a fundamental role in preparing young people to manage change and uncertainty, on the basis of wisdom and independence of judgment.

There is also a moral imperative to make this choice and to make it well: the debt created by the pandemic is unprecedented and will have to be repaid mainly by those who are young today. It is therefore our duty to equip them with the means to service that debt, and to do so while living in improved societies. For years, a form of collective selfishness has led governments to divert attention and resources towards initiatives that generated guaranteed and immediate political returns. This is no longer acceptable today.

A few days before ending my term as President of the European Central Bank last year, I had the privilege of addressing students and faculty at the Università Cattolica in Milan. The purpose of my address was to try to describe what I consider to be the three qualities that are indispensable to those in positions of power: the pursuit of knowledge, so that decisions are based on facts and not just convictions; the courage to take decisions, especially when not all their consequences are known with certainty, since inaction itself has consequences and does not exempt decision-makers from responsibility; and the humility to understand that the power entrusted to them is not to be used arbitrarily, but to achieve the objectives that the legislator has assigned them within a specific mandate.

I was reflecting then on lessons learned over the course of my own career. I could not have imagined how quickly and how tragically our leaders would be called upon to demonstrate those qualities. But today’s situation requires a special, additional form of commitment. As I have already underlined, the emergency we face requires more discretion on the part of governments than in ordinary times. This imparts on them a greater duty of transparency in their actions, and a greater obligation to explain how those actions are consistent with the mandate they have received and with the principles that inspired it.

If its foundations are not to be built on sand, the construction of the future must involve all of us. Society must be able to recognise itself in the choices made and the direction set, so they cannot be easily reversed later. Thus transparency and sharing – which have always been essential for the credibility of government action – are fundamental today, because the discretion that characterises our current state of emergency is also producing choices whose effects will reverberate for years to come.

This need for collective affirmation of the values that hold us together, and for a shared vision of the future we want to build, applies as much at the European level as it does within our own countries. The pandemic has severely tested social cohesion across the globe and resurrected tensions even between European countries.

Europe can emerge strengthened from this crisis. Government action rests on foundations that have been rendered secure by monetary policy. The EU Next Generation fund enriches the European policy arsenal. The recognition of the role that a European budget can play in stabilising our economies, and the precedent of issuing common debt, are important and can form the basis of the design of a common Treasury ministry. The benefit of such a prospect in bringing stability to the euro area has long been established.

After decades of European decision-making dominated by inter-governmentalism – where the will of individual governments prevails – the Commission is once again at the heart of the action. In the future, we can therefore hope that the decision-making process will once again become less difficult, reflecting the conviction, felt by most people, of the need for a strong and stable Europe, especially in a world that seems to doubt the system of international relations that has given us the longest period of peace in our history.

But we must not forget the circumstances that brought about this step forward for Europe: the solidarity that should have been spontaneous was the fruit of negotiations. Nor should we forget that the strong and stable Europe we all want is one where responsibility goes hand in hand with, and legitimises, solidarity.

So this step forward will have to be cemented by the credibility of economic policies, both at European and national level. Then it would no longer be possible to say, as some have done, that the changes brought about as a result of the pandemic are temporary. Instead, we would be able to consider the reconstruction of European economies truly as an undertaking shared by all Europeans and as an opportunity to design a common future – as we have done so many times in the past.

It is in the nature of the European project to evolve gradually and predictably, with the creation of new rules and new institutions. The introduction of the euro followed logically from the creation of the single market. The development, first, of shared fiscal rules, and later the banking union, were necessary consequences of having a single currency. The creation of a European budget – which is the natural direction of the evolution of our institutional architecture – will one day correct the gap which still exists.

This is a time of uncertainty and anxiety, but it is also a time of reflection and common action. The road ahead can surely be found and we are not alone in our efforts to find it.

We need to support young people by investing in their education and training. Only then, with the clear conscience of those who have fulfilled their own responsibilities, will we be able to say to the youngest in society that the best way to find your direction in the present is to design your future.