The Next Generation EU programme is full of pitfalls for many EU nations, as here in Italy.
Sergio Cesaratto is Professor of Growth and Development Economics and of Monetary and Fiscal Policies in the European Monetary Union, University of Siena. His newest book, “Heterodox Challenges in Economics – Theoretical Issues and the Crisis of the Eurozone” was recently published by Springer
The original, longer version in Italian was posted by economica e politica
The European Next Generation EU (NGEU) recovery plan to deal with the economic crisis resulting from the pandemic is the uninvited, imposing guest causing the present Italian government crisis, as an excuse for quarrelling or as an object of political diversion. I shall make some observations on the resigning government’s Recovery and Resilience Plan (Piano di Ripresa e Resilienza dell’Italia, PNRR), sure that any future government will not change much of its substance.
The PNRR is ambitiously presented as an opportunity to regenerate the entire Italian economy. Reading the government document, the first thing one notices is the absence of any analysis of what has not worked in recent decades. With the exception of a few valuable points, the document is full of rhetoric, spiced with political correctness – social inclusion, gender issues, and so on – and lacking a design of what the plan actually should be dedicated: an industrial policy design aimed at increasing Italian competitiveness.
While it is clear, on the one hand, that without a recovery in domestic and European demand, and a non-penalising euro exchange rate, there will be no recovery in investment. On the other hand, it is important for the nation to make an effort on the supply side towards industrial modernisation. (I goes without saying that when we talk about industry we are not only referring to manufacturing, but also to services and the primary sector. Still industry in the strict sense is at the top of the list). However, not only does the document not present any macroeconomic analysis, it does not even present a structural analysis of the Italian economy, so as to show its strengths (to be enhanced) and weaknesses (to be remedied, if useful and possible).
Once upon a time, this analysis would have been based on tables of sectoral interdependencies (or input-output), or on an analysis of the trade balance, or it would have been used to derive planning ideas. None of this is present. There is a very serious result in the decline of economic education and practice in Italy which, with the disappearance of the generation of the great economists of the post World War II period, have lost most of the analytical skills and even interest in these issues, under the illusion that the whole economic problem can be solved by freeing market forces. Consistently, since the 1980s, industrial policy has given up the idea of pro-active (vertical) policies to develop new sectors in favour of (horizontal) policies aimed at creating an investment-friendly environment for firms to follow their market instincts. But even these policies, in the European approach adopted by the Italian government, have failed miserably in the past.
In fact, it could be claimed that the Italian document follows those lines dictated by the European NGEU, and if this is true, why didn’t we oppose it? As a recent document of the Italian Parliament explains:
On 21 December 2020, the European Commission published sectoral guidance templates, which may be updated, to assist Member States in drawing up Plans in accordance with state aid rules.
The Plan should in particular: explain how it represents a comprehensive and appropriately balanced response to the Member State’s economic and social situation and detail the projects, measures and reforms envisaged in the following six-pillar policy areas: (1) green transition; (2) digital transformation; (3) smart, sustainable and inclusive growth, including economic cohesion, employment, productivity, competitiveness, research, development and innovation and a well-functioning single market with strong SMEs; (4) social and territorial cohesion; (5) economic, social and institutional health and resilience, including with a view to increasing resilience and crisis preparedness; and (6) policies for the next generation, children and youth, including education and skills.
As you can see we are in the midst of rhetorical posturing, where the sustainable industrial policy goals that should be central to Europe and individual countries are mixed up with presumed social goals. This sounds very hypocritical, as the EU has no social goals except in for spin. This can be seen from the absence in its statutes of the goals of full employment and regional equalisation in social rights, in light of the fierce austerity policies imposed in the past decade on some countries, and in the incessant call for labour market reforms (aimed at dismantling social inclusion) that again predominates even at this juncture.
The European NGEU plan is therefore far from prefiguring a European industrial policy, let alone suggesting its adoption at national level. The suggested guidelines are so confused that they can be considered too little and too late in terms of aggregate demand and social support; and useless in terms of industrial supply.
Too little and too late
The ambiguity of the plan appears all the more dangerous because its implementation is accompanied by not-so-subtle threats about the expected compliance with European fiscal constraints. We read in the Parliament document that the EU requires national plans to be consistent
with the country-specific challenges and priorities identified in the context of the European Semester, and in particular in the country-specific recommendations and the Council recommendation on the economic policy of the euro area (for Member States whose currency is the euro).
Further specifying that:
As already foreseen in the agreement reached at the European Council in July, the provisional agreement regulates measures to link the arrangement to sound macroeconomic governance (so-called Macroeconomic Conditionality). These mechanisms, which are aligned with the common rules on structural funds, provide for the Commission to propose to the Council a full or partial suspension of commitments or payments in the event that a state has not taken effective action to correct its excessive deficit, unless this has been the result of a severe economic downturn for the Union as a whole.
We also learn from the Italian Parliament document that: “The European Recovery and Resilience Facility (RRF), the main financial source of Italy’s Recovery and Resilience Plan (PNRR), assures our country in the period 2021-26 about €65.5 billion in grants and €127.6 billion in loans, or a total of €193.1 billion (in 2018 values), which the Government intends to use to the full…. The first 70% of RRF grants will be committed by the end of 2022 and spent by the end of 2023.”
Overall, these are very limited resources, spread over several years. The reader is also reminded that the largest share of the European funds we are talking about consists of European loans, albeit long-term ones. Moreover, precisely in order to comply with European fiscal constraints, a large part of the planned investments are substitutes for and not additional to the public investments already planned by the government, dramatically limiting the impact on aggregate demand and ultimately on private investment.
All this raises the question of whether the country is not walking into a trap no less dangerous than the one many fear with regard to the European Stability Mechanism (ESM), by becoming indebted to the EU without being able to utilise the borrowed funds effectively.
Unfortunately, from the Parliament’s document we also deduce that Italian politics has not the slightest awareness of these problems: “The parliamentary indications concerning, in the field of interventions for justice, the protection of women prisoners, alternative measures to detention and support for women victims of violence are not expressly reflected in the Plan”. This is just to confirm the level of cultural degradation of Italian politics, in this case presumably of the “left”.
The plan, what plan?
Slavishly following European guidelines, the Italian project identifies three strategic axes – digitalisation and innovation, ecological transition, and social inclusion – and three transversal priorities: women, young people and the south. Then the government project identifies six general objectives and 48 lines of action. The objectives are:
1.Digitalisation, innovation, competitiveness and culture; 2. Green revolution and ecological transition; 3. Infrastructure for sustainable mobility; 4. Education and research; 5. Inclusion and cohesion; 6. Health.
It is immediately clear that most of these objectives are not related to industrial policy, which is scattered here and there in a mix of socio-ecological and economic-industrial objectives.
Thus, the document bends towards the pseudo-social vagueness of the European Commission without addressing the fundamental problems that concern the economic survival of our nation (and of Europe itself). To avoid any possible misunderstanding, social inclusion should be addressed at European and national levels by discussing without rhetoric wages and inequality, and the reintroduction of rights in the labour market, which had been dismantled with European support. Social objectives such as education and training, increasing female and youth activity rates, the modernisation of the labour market and job placement are fundamental (in Italy true emergencies), but they should be placed in the plan with a view to industrial competitiveness. “We make Italy a success or we die”, as was said during the struggle for Italian independence. A dispassionate analysis should also be made of why In Italy school education, vocational training and job placement work badly, and why it has been impossible to reform them for years due to failures of all the parties.
To sum up
A first consideration concerns the underlying philosophy of the European recovery plan and of its Italian application built around the usual view of interventions on the side of strengthening the competitiveness of supply without the necessary support for aggregate demand.
A second consideration is that, even if only measured from the standpoint of supply-side economics, the plan is too small in financial terms and excessively diversified into a myriad of different and unrelated measures, the result more of listening to specific lobbies than of an overall strategy. The PNRR‘s mix of social and industrial objectives is striking. If the EU intends to pursue social objectives, in the short term in relation to the pandemic, and in the long term as an equalisation of social standards, it should do so with appropriate measures that do not involve creating further debt for the most financially troubled countries, but rather fiscal transfers between countries or better by issuing eurobonds.
The third consideration concerns the design of industrial policy, which is absent at both European and national level. In the case of the Italian PNRR, this design is, to say the least, vague, with generic objectives (digital and green), while the effects on national industry are not specified. Indeed, it would be more appropriate to speak of a European rather than of national industrial policies. However, a European industrial policy aimed at competitiveness on world markets and the target of spreading industrialization throughout the Union is absent, as national (Franco-German both from the public and private sectors) interests prevail.
In Italy, the liberal culture of the parties (left and right) and their economic advisors has meant that the PNRR has adapted itself chameleon like to the agenda drawn up by the EU, so that instead of a national industrial plan, also based on the development of education & training, technology and research, we have a patchwork of objectives often spiced with pseudo-social rhetoric. There is no analysis of recent economic history, no snapshot of the country’s industrial structure (in the broadest sense), and of structural changes underway. It is inconceivable that the current political Italian culture remembers what remains of the glorious Italian Partecipazioni Statali (State owned enterprises), as a managerial and technical tool on which to leverage, in synergy with the private sector, public research and possibly foreign partners to enter promising sectors.
Lastly, we have not touched on the problem of governance of the PNRR, to which, among others, a competent Italian economist and politician, Giorgio la Malfa, has drawn much attention. La Malfa evoked Cassa per il Mezzogiorno, the authority for the development of Mezzogiorno (1950-1984). It seems to us that a unified and coordinated direction of the recovery plan implies that it contains coherent and verifiable objectives and not a mixture of confused social and economic objectives. The aim here is to recover a culture of planning. The evocation of Cassa del Mezzogiorno is not so far-fetched, given that its origins lie also in the American remonstrances that Italy use the Marshall Plan funds wisely. But Italy had emerged from the anti-fascist struggle with a ruling class capable of vision and creating an effective and successful programme. This is just the opposite of what we see today.