Will Next Generation Eu be good for Italy? Here’s how and how much. Cdp report
The think tank of the Cassa Depositi e Prestiti hypothesized the impacts of the Next Generation Eu on the Italian economy. The deepening of Giuliano Cazzola
The think tank of the Cassa Depositi e Prestiti has published a document (prepared by Andrea Montanino, Gianfranco Di Vaio, Angela Cipollone, Silvia Gatteschi whose opinions, as the authors specify, do not in any way commit the responsibility of Cdp) in which, on the on the basis of the information available on 8 October, the impacts of the Next Generation Eu are hypothesized, in the light of the possible scenarios of Covid 19. The main points are summarized in the Brief. First of all, it should be noted that the impact over the next 3 years will depend not only on the epidemiological framework, but also on the spending capacity.
As regards the first aspect – the importance of which has a decisive character – the impact estimates are prepared under 3 scenarios on the evolution of the contagion: basic, optimistic and pessimistic. Depending on the scenario considered, thanks to investments financed through European resources, the average annual growth rate of Italian GDP between 2021 and 2023 would be up to one percentage point higher than what would be achieved without European resources.
Consequently, in summary, both the situation on the labor market and the dynamics of the public debt / GDP ratio would improve. The stock of employees in 2023 could be higher by more than 170 thousand units compared to what would always be observed in 2023 if the funds were not used, depending on the scenario considered. The public debt / GDP ratio would be at least 4 percentage points lower. Declining the possible scenarios, the document argues – observation is important in terms of the policies to be adopted – the use of Next Generation Eu would be more relevant if the epidemiological situation worsens, or if the second wave of infections results in a new lockdown. In this case, the use of European funds would guarantee a positive real GDP growth rate also in 2021, thus avoiding a second recession for Italy and a further worsening of the public debt / GDP ratio in the coming years, compared to the already high level. expected for 2020.
It goes without saying that the effectiveness of measures aimed at structurally modifying the growth rate of the economy remains in the background, through investments and reforms that improve the overall productivity of the economic system. The real challenge could be after 2023.
Continuing the reading, the evaluations become more articulated taking into account the possible variables, in relation to the many uncertainties that hover over the economic scenarios: on the one hand, a multiplicity of nations is experiencing a second wave of infections, which could translate into a new phase of lockdown; on the other hand, the race to identify a vaccine continues, with the hope that the first human trials will trigger the desired immune response. Depending on whether one goes in one direction or the other, the effects on the economic recovery could be very different and, therefore, could also be taken into account in the elaboration of the economic policy measures implemented at this stage by the various governments. Having said all this, the document analyzes three different economic scenarios, which assume three different evolutions of the pandemic crisis, in order of severity
.1. "Pessimistic epidemiological picture", with a second wave of infections leading to a new lockdown between the last quarter of 2020 and the first quarter of 2021, similar to that experienced in the first part of 2020;
2. "Basic epidemiological framework", with a gradual return to "pre-crisis" normality, which provides for a progressive relaxation of restrictions between the end of 2020 and the beginning of 2021;
3. "Optimistic epidemiological framework", which provides for a wide availability of vaccines, therapies and traceability networks, with a faster return to normal without permanent damage due to the crisis.
Based on the information currently available on vaccine testing timelines, the optimistic scenario seems less likely than the other two, which instead seem equally realistic.
In the event that the epidemiological scenario does not change significantly in the coming months, such as eg. in the basic framework, or to return to normal in a sudden way, eg. in the case of the optimistic picture, the world and the Italian GDP would experience a strong rebound in 2021, returning in the very short term to pre-pandemic levels.
If, however, the second wave of infections should lead to a new lockdown, such as eg. in the pessimistic picture, the world economy and the Italian one would not show the rebound in 2021 expected by the other two scenarios. In this case, while world GDP would return to 2019 level in 2022, Italian GDP would not return to pre-Covid level by 2023.
These three possible evolutions – the Note proposes – should also be taken into consideration in the economic planning documents, both to define any public finance needs and consider any risk scenarios in the various cases, and to define the times of use and allocate the resources of Next Generation Eu more effective.
What, then, could be the effect of European funds on the Italian economy based on the scenario that will occur? The document – at this point – summarizes the amount of the Next Generation Eu "package" equal to 750 billion euros – divided between grants for 379.4 billion, loans for 360 billion and 10.6 billion guarantees: resources that Commission should find on the market by issuing securities guaranteed by the European budget.
Analyzing the resource allocation criteria, the note estimates that Italy could receive around 205 billion euros, of which 77 billion in grants, 126 billion in loans and 2 billion in guarantees.
According to the information contained in the Nadef 2020, the grants would be used entirely to finance additional public investments, while the loans would be partly directed to new investments and partly to finance existing spending programs.
Therefore, for the simulations it is assumed that the grants go to finance new public investments, while about 50% of the loans are used to finance spending commitments already undertaken and the remaining 50% go to finance additional investments.
In the model, both the grants and the part of the loans addressed to already planned investments do not generate new debt. Furthermore, the entire loan component, both the one intended to finance additional investments and the one aimed at already scheduled commitments, would contribute to reducing the cost of debt. The simulations therefore foreshadow that the expansionary effects that are realized in the three-year period 2021-2023 are entirely generated by greater public investments – and private through guarantees – financed through European resources. The spending time profile of European funds follows that reported in the Nadef 2020.
Between 10% and 15% of the total resources would be allocated in 2021, about 20% between 2022 and 2023, while the remaining part would be used starting from 2024.
As already anticipated, the impact on growth deriving from the use of European funds would be slightly greater in the pessimistic epidemiological framework. This result – specifies the Note – is not really surprising. In fact, in the optimistic picture, the restoration of a climate of confidence due to the containment of the epidemic could generate an increase in the price level, which would erode the purchasing power of consumers and businesses, weakening the multiplicative effect of public investments induced by the European program. on private consumption and investment.
Considering the estimate results in detail, it emerges that, thanks to the subsidies of the Next Generation Eu, between 2021 and 2023 the average growth rate of real Italian GDP would be higher by up to one percentage point per year compared to what it would realize in the absence of European funds.
In particular, in the pessimistic scenario, the average annual growth rate in 2021-2023 would be higher by about 1% in the presence of European funds. This value drops to 0.9% in the base scenario and 0.8% in the optimistic scenario.
Thanks to this higher growth rate, the Italian GDP in real terms in 2023 would be about 2.8% higher in the case of the base and pessimistic framework than the GDP estimated in the absence of European funds. In the optimistic picture, the level of GDP would be higher than 2.5% In essence, the impulse to aggregate demand in the three epidemiological frameworks by the resources of the Next Generation Eu would, in fact, determine trajectories of economic recovery that are significantly different from those that could occur in the absence of European funds.
In the pessimistic epidemiological framework, the use of Next Generation Eu resources would contribute to bringing the Italian GDP closer to the level before the pandemic crisis by 2023 without this however being reached (in fact the gap with respect to the pre-pandemic level would be 2.7 %).
Due to the sharp contraction in output generated by the pandemic crisis, the public debt / GDP ratio could increase significantly compared to its pre-pandemic level. This increase would be the greater the worse the epidemiological picture was.
In particular, if the epidemiological scenario does not change significantly, or in the case of the basic framework, the public debt / GDP ratio could reach 149% in 2023. This percentage would rise by as much as 20 percentage points if the second wave of infections we are observing imposed the need for a new lockdown, as in the case of the pessimistic picture. On the other hand, it would drop to 142% if the wide availability of vaccines, therapies and traceability networks allowed a quick return to normal, if the optimistic picture were to occur.
In this context, the investments conveyed through Next Generation Eu could bring significant benefits in the dynamics of the relationship between public debt and GDP thanks to the following aspects:
- Greater economic growth;
- The grants would not add to the public debt of the beneficiary countries, including Italy;
- Countries with high public debt, such as Italy, that resorted to loans would pay lower interest rates, compared to those that derive from resorting to the market.
In particular, in the optimistic picture, thanks to European transfers, Italy could benefit in 2023 from a public debt / GDP ratio lower by about 3.9 percentage points (pp) compared to what would be achieved in the absence of funds. This reduction would rise to 5.5 pp both in the basic epidemiological picture and in the pessimistic picture
As for the employment dynamics, 2019 ended with a number of employees in Italy at an all-time high, about 23.4 million. Since then, according to the latest available data, the number of employees has decreased by about 400,000 units, returning to the level of the end of 2017.
The use of funds of Next Generation Eu could help bring in the short term the stock of employed in Italy at the 2019 level.
Assuming that the participation rate in the labor market does not change significantly with respect to the historical trend, thanks to investments financed through the Next Generation Eu, the number of employees in 2023 would be higher than what would be observed without European funds by at least 154,000 units, which would rise to 174 thousand units if the pessimistic picture were to occur. As regards the pessimistic epidemiological picture, the funds of the Next Generation Eu would accelerate the recovery of the pre-pandemic level of employment, without however achieving this. In the optimistic epidemiological framework, already in 2022, even in the absence of European funds, it would return to the levels of 2019. In the basic epidemiological framework, however, the employment level of 2019 would be recovered by 2023 only thanks to the use of Next Generation funds Eu.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/next-generation-eu-fara-bene-allitalia-ecco-come-e-quanto-report-cdp/ on Wed, 21 Oct 2020 10:40:40 +0000.