Commentary: 

“Uncertainty on the economic impact of the COVID-19 pandemic is very high. Italian GDP fell by 4.7 per cent in the first quarter of 2020. The available information suggests an even larger contraction of economic activity in the current quarter, which is expected to be particularly severe in the service sector. The timing and strength of the recovery will depend on several factors that are hard to predict: the duration and geographical spread of infection, developments in the global economy, the impact on confidence and hence on household spending and firms’ investment decisions, possible financial repercussions. They will also depend, to a significant degree, on the effectiveness of economic policies.” Note on covid, Bank of Italy.

In February of 2021, a year after the start of the pandemia, Italy’s government was overhauled and the economist Mario Draghi former head of European bank became prime minister.

We talk to Lucio Caracciolo about the current situation in Italy and the role of government during an economic crisis.

1- How has the covid pandemia impacted world economy?

First of all I wouldn’t call covid 19 a pandemia, I would agree with mr Fauci (Anthony Fauci director of the U.S. National Institute of Allergy and Infectious Diseases (NIAID) and the chief medical advisor to the US president), who said that pandemia is some kind of borderline semantics, coming from the Greek pandemos, meaning all the people. In fact, if you consider countries simultaneously you have completely different pictures. For example, now in China the economy is booming again because covid 19 is not as dangerous as it seems to be elsewhere particularly in Europe. China is taking advantage of this situation and growing more or less as it was before the corona virus crisis. On the other hand, the western world suffered serious losses in terms of economic growth but most of all in terms of social cohesion.  I assume that you have some experience of that also in the cultural and educational domain because of the impossibility to have a normal school year. So there are many gaps which mean that the impact of covid 19 is and will be quite different from country to country, starting with the number of casualties but also considering social and political impact.

2- Do you think relations between countries have changed because of covid? Will this crisis affect international relations long term?

The main challenge in the geopolitical domain will be the challenge between US and China about who will be number 1 in this century. This is the biggest challenge worldwide as it affects not only the two countries but all the world, starting with Europe. For example the Belt and Road initiative which is an economic trade but also geopolitical project invented by the current Chinese leader Xi Jinping is meant to build a special interaction and relation between China, the Far east and Europe. Since we are living under an effective and informal American empire the fact that a country like Italy has signed a memorandum of understanding with China two years ago without probably knowing the geopolitical consequences of that, means that China is becoming more active in Europe and this is one of the challenges Americans and Europeans are facing with different means and different purposes. Clearly, Americans have a tougher approach to China, Europe has a different approach but not as tough as Americans. In terms of trade Germany, the most relevant country in Europe, has created a strong network of economic and trade connections with China. China has become its main market making it impossibile  to cut all contact with Beijing.

3- In times of recession, do you think government intervention is required to salvage the economy?

Of Course it is. We are faced with a need and an emergency and the reason why states exist is for the protection and safety of its citizens.  States where invented with the purpose of protecting citizens in and outside our society. Now more than ever, since we live in very dangerous but also very interesting times it is important that government to some extend help with initiatives that help the economy grow. After Brexit, the approach in London changed and the United Kingdom is thinking in terms of Global Britain outside the European market, looking to reconnect with the commonwealth countries and more specifically with the former colonies including and starting with America. More than ever Britain is pursuing a relationship with United States of America through programs like Boris Johnsons’ ambitious Defense project aligned with the US in the pacific region to try to contain Chinese expansion and evolution.

4- In economic terms what kind of intervention governments can implement to try to make the economy recover and grow again?

There is no universal blueprint as far as the kind of public interventions for the sake of stimulating the growth of the economy are concerned. And certainly, as soon as we will recover from this double emergency – health and the economy – a fresh debate will start among Europeans about how to go back to the old normal – id est a kind of German austerity, including the former fiscal compact- or how to evolve towards an expansionist (Italian ad French) approach. Which would maybe bring about Eurobonds and strong investments in infrastructure, science and technology. As an Italian, I hope this second approach will prevail. In any case, Europe will be again divided along our different economic and cultural fault lines.

5- Italy now has Mario Draghi as prime minister. What is the importance of this? How do you think the government will intervene to improve the economy?

The reason we now have Mario Draghi as prime minister is because he is considered to some extend our last chance to bring about all the benefits of EU funding to our country. We are theoretically allowed to get up to 200 billion euros from Europe to invest in a new kind of economic growth considering the green deal and digital economy but also to build provisions for Italy. This is the main decisive challenge we face. Mario Draghi was chosen by president Mattarella because of his excellent connections In Europe, America and Worldwide as a former Bank of Europe President. He is rightly considered as the most able technocrat and politician in Italy as far as his international connections are concerned. He is supposed to be a guarantee for the Germans and secondly the rest of the eurozone conveying the sense Italy is changing forwards and trying to restart the economy after covid. We have now a serious emergency, vaccines are not sufficient and the reaction of society is quite problematic.

6- In the UK, chancellor Rishi Sunak has recently unveiled the new budget for the year and has implied the population will have to pay more taxes to cover the cost of the recovery. Are there ways to improve the economy without creating negative externality?

I have bad news. It’s inevitable younger generations will pay a substantial price in many ways for this crisis in many areas including economic and cultural. On the other hand, you must consider the special position of Britain in the world economy. Britain is now heading in the direction of becoming a financial hub, some kind of super Singapore in the Northern Sea betting on the fact that London has always been one of the most relevant economic hubs worldwide and the city is the symbol of this position. At the same time there is a geopolitical risk: probably Scotland will ask for a referendum in one or two years, the Irish question is now more open than ever and the relation between London and the rest of England and the UK requires balancing  as the result of the Brexit referendum has shown.

7- As a European expert, what is your view on the effect of Brexit long term?

I think It didn’t change that much in terms of substance because Britain never was really a part of the European union. Formally it was but culturally, strategically and geopolitically it was half half as it was never wholeheartedly a part of the European Union as many brits probably didn’t feel or don’t feel Europeans as the French, Germans or Italian, There was still a distance, a cultural and geopolitical gap. At the same time, since Britain is what is left of the British empire, Britain has a very unique view of the world which is more aligned perhaps with America and the countries of the commonwealth. It is closer to them than it is to Belgium, Italy or Spain for example. Firstly, we need to ask whether London have the dimension to be a relevant player worldwide without any influence in the European Union.  One of the reasons why the British were in the union was that being part of the club meant that for their American friends and allies Britain was a way of influencing the European Union, putting together British and American influence and playing similar cards in the European game. This is why for example London never thought really of joining the euro and why normally the Uk had always the role of an outsider inside the EU. So this is the picture before Brexit. Now we have a formal break between UK and European union, which was quite complicated and our relation has worsened. Frankly I can’t think of Britain as another planet, Europeans and Brits are close and have a lot in common and I don’t believe Brexit will  bring about a true barrier between UK and Europe. There is still room for compromise and a pragmatic approach which are the typical ways to find solutions to a problem.

8- What will be the most important change the pandemia will bring to the world long term?

We already see political and economic crisis in many European countries. People are really questioning the ability of governments to face this challenge and provide protection of the economy and their health. Governments need to find a compromise between protecting the citizen’s health and at the same time avoid disrupting the economy. It’s quite a challenge to find the balance between these two things. Britain it seems has won the vaccine challenge with a pragmatic approach that establishes people get one shot instead of two. We will see in the next couple of months governments in Europe being challenged. They will be defied by the public opinion and their legitimacy will be questioned.