Gustavo Piga – Saving the EU: how much to spend and how to finance it

The European Union is egregiously underperforming economically, but is boldly trying to make things worse

Gustavo Piga is Full Professor of Economics at the University of Rome Tor Vergata

You will find the original version in Italian at Gustavo’s website

Translated by BRAVE NEW EUROPE

Opera: “Pietra d’angolo”. Copyright opere Angela Maria Piga, all rights reserved.

The only person capable of engaging the Continent’s institutions to look at the future of the European Union starting from the fact of its incredible under-performance over the last fifteen years when compared to that of the United States, while at the same time trying to stimulate greater awareness in EU leaders of the gigantic challenges facing the planet, appears to be Mario Draghi.

“The gap is everywhere: in productivity, in GDP growth, in GDP per capita,” the former Italian Prime Minister said recently. A gap that ‘is widening especially after 2010’, due to ‘an investment gap of EUR 500 billion’. The data in fact show how this gap with the US has been largely concentrated in public investment since the beginning of the last decade, revealing without fear of contradiction the almost unique cause of this disparity: it is in fact that since the beginning of the second decade of the century the EU has decided, in a senseless manner, to move away from the fiscal policy paradigm useful to emerge, as history teaches us, from extraordinary financial crises such as that of 2008.

The introduction of the Fiscal Compact in 2011, a unique experiment (both looking at past and current history of all the nations of the rest of the world) in fiscal policy, has not only prevented the EU to this day (even when the EU Recovery and Resilience Facility became operational!) from using public investment as leverage to quickly lift the continent out of the crisis that began to grip it in 2009. It also stooped the EU from providing employment opportunities and dignity to the less well-off and less well-educated through hiring in the construction sites that could have been opened, from boosting the productivity of European companies, and finally, due to its negative inter-temporal perspective of three-year austerity plans, from allowing a vigorous recovery thanks to a strong dose of pervasive optimism meant to have private investment restart, as has happened in the USA.

Draghi’s words now inevitably place Europe before two extraordinarily important questions: is Europe ready to turn the corner with a European fiscal policy that is finally truly expansionary? And if so, how to do it?

The answer to the first question would unfortunately seem to be a resounding ‘no’. Indeed, the recent reactions of the French, German and Italian governments faced with a worsening of their cyclical situation, with a lower-than-expected GDP for 2024, has been representative: not so much that they want to stabilise GDP at its initially expected level by means of an expansive fiscal policy, but rather to stabilise the public deficit that has been put in difficulties by lower growth, by means of more austerity (and thus even lower growth!). A reaction that does not come as a surprise to those who saw in the new EU Stability Pact agreement a tragic confirmation of the decades-long austerity, and which makes a total paradigm shift, as Draghi would like to see it, objectively complex.

As for the second question, the how, there are obviously two ways: one with debt issued at European level (and public spending inevitably increasingly decided in Brussels), the other with debt issued in each individual member state (and public spending increasingly decided at national level). Draghi prefers the first solution, not least in order to give an acceleration to the cherished and shared project of the United States of Europe. This, however, presupposes a willingness on the part of the individual member states not only, as mentioned earlier, to finally become expansionary, but also to give up a significant piece of fiscal sovereignty, an operation that seems particularly difficult at least in the two economically most important countries, France and Germany, and that could also give rise to a generalised growth of anti-European populism if a top-down policy disregards individual local needs and instead prefers a standardised approach. After all, the oft-cited model of the US centralisation of fiscal policy did not materialise until 130 years after the union of the American states, i.e. only when the specificities and cultures of the individual states finally merged and gave way to Roosevelt’s New Deal.

The alternative would be to ask each individual member state to work independently, with larger national deficits, to finance the required public investment, for a sum altogether identical to what Draghi imagines should be collectively raised in Europe. The advantage of this move, following a common agreement between member states, would be to keep nationalism and anti-European populism at bay, a not insignificant effect. However, it would require – Italy in particular – to work much harder to learn how to spend well, with a spending review also aimed at allaying the fears of the ‘Europe of the frugal’: a very complex task, in the light of the delays Italy has had in setting its Recovery and Resilience Facility in motion and the lack of interest in investing in the quality of public administration personnel. Yet this would remain a second path that could finally set the EU continent on a trajectory of progress and growth, laying the foundations for a future federal union.

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