Why Italy Had to Shut Down To Contain COVID-19 (w/ Raoul Pal & Giovanni Pozzi)
GIOVANNI POZZI: And the on the economical role, of course talking about Italy means talking about Europe and talking about the world. But there's a lot of talking about Europe itself. Right? So, Europe is less prepared to deal with supporting the economy because it has less ammunition on the monetary policy side and on the fiscal policy side. Fiscal policy side because of the cultural clash historically between the German-led austerity and the Italian-led approach, or Latin-style approach, to the rules, if you want. Now, there's a few points I would like to make here. First, organically, let's not forget that the welfare system in Europe is better suited for these crises. We've already seen this in the past in the global financial crisis. Now, this is, of course, the flip side of the coin of then having a continent that grows more slowly. But in this moment in time, it's the downside that matters more. So, take, for example, the social tools available as safety nets. In Italy, we have the [indiscernible], which is like a wage guaranty fund managed by the INPS, the National Institute of Social Insurance, that pays 80% of the salary for about a year. It kicks in very, very quickly. And it did kick in very, very quickly for small companies these days. And that helps a lot in avoiding layoffs, moving the costs from the private to the public. Again, that might come at a slower growth in the future, but who cares today? So, that's one thing that people should not forget when comparing Europe to the other continents. RAOUL PAL: You're trading social benefit for growth, which some people don't understand. But Europeans took that, and in many respects, it helps cushion the worst outcomes. As you say, it gives you a bit of downside protection for the average person. But it gives upside issues for sovereign debt. GIOVANNI POZZI: Correct. Now, back to the monetary and fiscal policies. So, monetary policy-- for sure, the rates are well below zero. We know that. So, there's not much room to decrease those. But does it really matter? Are lower interest rates what matter in this moment in time? If a small company's cash flow is negative, they need money. They would pay 10% rate. They don't care whether the rates are at zero, or one, or two, or three. So, I don't think that matters much, and that's something that we could expand on talking about the Federal Reserve move. But it doesn't do any harm, but that's not the pure solution. On monetary policy, we know there are many unconventional tools that, by now, are conventional. And the ECB started using some of those yesterday. Despite the communication error of Mrs. Lagarde, some of those tools are already active. Banks are being helped, and banks are giving out credit more quickly to the small companies. They're calling the companies, telling them, we have the tools to help you a little bit, to improve your overdraft limit, and so on. This is happening. Talking to people on the ground, we have evidence of this happening. Now, on the fiscal policy side, it's a more cultural question. I think that before the coronavirus started, we were already in a very different situation. So, we've all heard the political pressure on Germany, also from internally from the bottom up-- call it black zero, call it Green New Deal. So, we have to admit we are in a different situation. I don't think Europe will let Italy go. We have had already a couple of evidences these days. Mrs. Merkel, a couple of days ago, the sweet repeat of Draghi's July 2012, but we'll do whatever it takes. That applied to monetary policy, of course, because he was at the helm of the ECB. She's in politics, so that applies to fiscal policy. Hopefully, it won't apply just to the media. And then Mrs. Fonderlai of the European Commission that in a perfect Italian-- I wonder whether she speaks Italian or whether she was reading, but it did work perfectly-- gave a message saying, [indiscernible], we are all Italian. And that wasn't a fake message. This is an exogenous, makes everybody feel bad. And as opposed to other situations in the past, there's not anybody in particular to be blamed. There wasn't any financial inconsistency or bad governance causing this. It's a more complex conversation, and maybe you have seen the video, the Ted Talk of Bill Gates from 2015 at Ebola time, so that's impressive. That's what we should be talking about, not Italy and Europe. So, that's clearly a shared global response. RAOUL PAL: Yes. But I guess the issue-- the next phase seems to be, and we all knew this when Lagarde came in, is the next step for monetary policy in Europe is tying to get a fiscal and monetary, somehow combining the nations, getting rid of the deficit ceilings and allowing some ability to move. What is your impression that the Europeans are going to do? Because they're going to have to do something really big at some point, because it's not just Italy, right? As you say, this is the whole of Europe that is in the same boat, just in a different phase. So, they're going to do something extraordinary to not lose the banking sector and to not lose all the small businesses and that kind of thing. What is your impression that they're going to do with the fiscal, monetary combination? GIOVANNI POZZI: That's a tough question to answer. I think they will go very gradually and very wisely. Maybe that will mean the markets in the short term will be disappointed, as they were yesterday. But I don't see this tide changing. Having said this, I think the help and the support that is needed will come. So, the budget deficit limits will be relaxed. Of course, it will be temporary, or the declarations will be it must be temporary. And rightly so, because this probably will have a temporary impact, not a permanent impact, or hopefully so. But they will come. So, I'm pretty confident that they will do the right moves, and I'm lucky I'm not there to take the decision for that.