The challenge of sustainability: ecological transition and public finance

Instituto per la Vigilanza sulle Assicurazioni (IVASS) has published a speech by Luigi Federico Signorini, General Director of the Bank of Italy, on ’The Challenge of Sustainability: Ecological Transition and Public Finance’ at the opening of the Italian Banking Association’s (ABI) Advanced Training Course.
In this speech, Luigi Federico Signorini focused on two key issues, namely the environment and public finance, and how they are interconnected with sustainability. Signorini emphasized the importance of taking action in the present rather than delaying, as this can exacerbate problems for future generations. He also stressed the need for a clear and consistent approach over time, rather than relying on emergency measures in times of crisis.
The author addresses environmental issues such as climate change, deforestation, and loss of biodiversity.
In Italy 29 out of 85 ecosystems are at high risk, covering 39% of the national surface. One-quarter of bird species are severely threatened while two-thirds are in poor conservation status due to loss of habitat, excessive pesticide use, and infrastructural planning. The author also notes the effects of human activities such as soil sealing, depletion of marine resources, eutrophication of waters, and climate change, which have altered species distribution, population dynamics, and the functioning of many marine, freshwater, and terrestrial ecosystems. Approximately 30% of marine prairies have been lost and forests in Italy, which are among the richest in biodiversity in Europe, are increasingly affected by wildfires, extreme weather events, and parasitic epidemics.Another problem is the decreasing water availability and increasing droughts in Italy.
He author argues that these problems require careful evaluation of costs and benefits, with a long-term perspective and without bias. Public policies and measures such as subsidies, taxes, and trading of natural resource rights are necessary to internalise the externalities of environmental consequences. The author suggests that influencing individual behaviour through pricing signals, such as carbon pricing, can be effective in achieving long-term environmental goals.
The ECB is committed to study the implications of climate change for monetary transmission and price stability and to take into account environmental sustainability requirements in its monetary policy operations. The evolution of climate presents risks, including credit risks, that banks and other operators must consider in their management strategies. The European Single Supervisory Mechanism (SSM) has published expectations for climate risk supervision for significant banks. Despite limitations in empirical verification due to uncertain and new phenomena, there is now ample literature on the subject.
Italy’s high public debt limits the government’s ability to reduce taxes and puts the economy and financial system at risk. It is necessary to set adequate targets and persistently pursue them, without postponing action. The primary surplus is a key indicator for debt reduction. In 2021-22, Italy’s public debt decreased by approximately 10 percentage points due to the negative differential between the average debt burden and nominal growth rate of the product („r-g“).
Moreover the challenge of ensuring the long-term sustainability of public finances in Italy in light of demographic trends is mentioned. The population is expected to decrease, particularly the working-age population, leading to an increase in public spending on pensions and healthcare. However, the author notes that the pension reform introduced in recent decades has helped to moderate long-term spending and ensure the financial stability of the pension system. The author suggests that flexibility in retirement could be introduced while maintaining the principle of actuarial fairness.
The author concludes that reducing high debt-to-GDP ratios in a realistic, gradual, and sustainable manner and promoting sustainable and inclusive growth are precisely the goals pursued by the proposal put forward by the European Commission for the reform of economic governance in the Union. The author notes that the debate on this reform is ongoing and stresses the importance of having a credible path of recovery supported by effective rules, both in the short and long term.
The conclusion of his speech emphasizes the importance of clarity about long-term goals, awareness of present actions required to achieve those goals, and continuity of action over time for both environmental transition and public finance recovery. The author advocates for rationality and foresight rather than austerity as the guiding principles for political action. Investing in reducing debt and combating environmental degradation can be a source of economic development and well-being. Public finance stability can support long-term economic growth by reducing uncertainty. Pursuing sustainable development is also an ethical decision that supports intergenerational equity. The author cites the Latin proverb carpent tua poma nepotes to underscore the importance of considering future generations.