Italy is confronted with a conundrum for German economists: increasing debt, but a reduced rate of debt to GDP
Carlo Clericetti is an Italian journalist. In the past he has directed “Affari & Finanza”, a weekly supplement published by “La Repubblica”, and web portals. Currently he blogs for “La Repubblica”, for his personal website “Blogging in the wind”, and writes for other websites on economy and politics.
Cross-posted from Blogging in the Wind
Translated and edited by BRAVE NEW EUROPE
The public accounts deficit will be 9.4% this year and will remain high for the next two years. Yet, as the government’s figures tell us, the debt/GDP ratio will fall. This is a demonstration of how wrong European policies and the rules – now suspended – that prescribed them were. But this is not necessarily enough to make them change.
The numbers Update Note of the Italian Treasury (Nadef) are instructive. Of course, we can rejoice at the 6% growth rate, which is well above previous forecasts. But above all we would do well to reflect on what they tell us about the policies of the past and the European budget rules that have guided them.
The government therefore forecasts 6% growth this year, with a very high budget deficit of 9.4%. Gosh, can we afford it with a public debt that in 2020 will reach 155.6% of GDP? Where will it go this year? And next year?
Well, this year it will go down, and next year too. It is always the Nadef numbers that tell us this. This year it is estimated at 153.5, next year at 149.4. Because of a strong budget surplus? Not at all: in 2022 the deficit will still be 5.6%, in 2023 3.9 (and the debt will still fall, to 147.9).
Only those who forget that we are talking about a ratio can be surprised: not of the debt in absolute figures (which will continue to rise), but of its ratio to GDP. If the denominator (GDP) grows more than the numerator (debt), the ratio obviously decreases. And why does this happen? Because government spending drives the economy, much to the chagrin of the austerity-minded.
Of course, there is another fundamental factor, and that is central bank bond purchases, which keep the cost of debt down. This is what we have been missing for a couple of decades, the very long period – starting in 1992 – in which public spending has always been lower than revenues, weakening growth, but the debt increased anyway because interest expenditure was very high.
Monetary debt financing is not an instrument that can be used lightly or indefinitely. It occurs when the central bank prints money to Daniel Franco and Mario Dragh to finance public spending or underwrite bonds issued by the Treasury. If it is used inappropriately, it can have negative effects on the external value of money (i.e. the exchange rate), the balance of payments and inflation. But it is, in fact, an instrument of economic policy, which, in certain situations, may be necessary to use. Italy renounced it definitively by joining the Maastricht Treaty and the euro. The Bank of Italy became part of the European system of central banks that form the ECB, which is explicitly prohibited by the Treaty from financing member nations. Moreover, budgetary policy was caged within the famous parameters, made more stringent and pervasive since 2012, during the previous great financial crisis. In practice, this is like denying a bottle of wine to a thirsty person in the desert by claiming that wine is bad for you. Of course too much wine is bad for you, but dying of thirst is a demented alternative.
It took the tragedy of the pandemic to wipe out that nonsensical economic paradigm. The entire structure of the Maastricht Treaty and subsequent follies has been thrown out. There are no limits on deficits, the first outline of a common European debt, and above all, the justification that the ECB buys public bonds to combat deflation – which is partly true – is pretended to be valid, while in fact it is financing state expenditure, as are all the other central banks.
The results, as we can see, are good. Will they be enough to definitively shelve the Maastricht economic paradigm, which, it should be remembered, is currently only suspended? Not necessarily. The fact that certain ideas are wrong may not be sufficient reason to abandon them, if they are considered functional by those with greater political weight. The forthcoming reform of the European budgetary rules will clarify whether the lesson has been sufficient or whether we want to continue along a path whose outcome can only fuel populism and produce a regression of democracy in an increasingly authoritarian direction.