The state will play a crucial role in the recovery. Word of Draghi
The speech by the Prime Minister, Mario Draghi, at the Accademia dei Lincei read and commented on by Gianfranco Polillo
More than an intervention , that of Mario Draghi, at the Accademia dei Lincei, on the occasion of the awarding of the Feltrinelli prize, was a lesson in economics. A text that should be studied in the classrooms by the University. And not only in Italy, given the extravagant voices heard in Europe: where someone is already thinking of returning to an old starting point. The pandemic crisis as a parenthesis of history, to be enclosed in a cocoon, to give new luster to the ancient rules of austerity.
The alternative in recent months, the Prime Minister recalls, hinting at the pandemic was between a "recession and a depression". The first was driven by governments, precisely to avoid the second which "would have caused a wave of bankruptcies". With "the closure of entire supply chains, with disastrous consequences not only for the economy but for the entire country". Therefore, between the two evils, the lesser one was chosen, even at the cost of causing a sharp increase in debt. Which “was therefore deliberate and above all desirable”. The price paid to keep businesses alive that, due to the pandemic, had been forced to close.
"Since the beginning of the pandemic" all this has cost "208 billion" for the guarantees offered and another "100 billion" for subsidies. The former destined to turn into private debt, the latter into public debt. Consequently, the ratio between public debt and gross domestic product, in 2019, increased in Europe by 15 points, in Italy by 25: "from 135% of GDP to 160%". And it is not certain that both will not increase again, should the pandemic continue to be fueled by the different "variants of the virus".
To pay the cost above all the workers. Whose reintegration into company structures can only be gradual. In the absence of any intervention, "families in the countries of the euro zone would have lost, on average, almost a quarter of their income". Instead, thanks to the intervention of individual governments, the relative loss was “7%”. Although it is still not clear how much the State guarantees on bank loans will weigh on the debt. At the moment, in fact, it is only foreseeable that "a part of this implicit debt will crystallize and then go on to increase the public debt".
On this still dark night, however, a glimmer of light can be glimpsed. “The Italian economy has operated below its potential for most of the past decade. There is therefore a lot of room to use expansionary fiscal policies before creating inflationary pressures ”: this is the central point of all subsequent reasoning. Backed up by the latest data on the economic situation which suggest a higher growth rate than the government forecasts. Even if all this is still not enough. "We must – this is the warning of the Prime Minister – achieve higher and more sustainable growth rates than in the recent past" if we want to deal with the breakdowns produced by the pandemic. And the transformations that followed.
"If we take the structural growth rate of the economy – he continued in his speech – beyond what we had before the health crisis, we will be able to increase tax revenues enough to offset the increase in debt we issued during the pandemic. ". With an immediate positive effect compared to the companies themselves, which will see their demand grow, improving their economic conditions. It would follow that the same potential cost of "the programs of state guarantees on corporate debt" would tend to decrease.
The numbers, as opposed to unmotivated fears, argue in favor of this thesis. Given the state of Italian public finance, in the more general European context, "it is sufficient to increase the structural growth rate by 1 – 1.25 percentage points to cover the cost of debt in the last two years". However, this requires a further condition: a more expansive policy, but strictly aimed at growth. “We must focus in particular on investments, which allow a revival of demand and an improvement in supply”. The logic of the PNRR , which is mainly aimed at “relaunching productivity. In Italy, total factor productivity, a measure of the economy's total efficiency level, was even lower in 2019 than in 2001 ”.
There is, however, another corollary which cannot be ignored. "If it is true that there can be no social cohesion without growth, it is also true that there can be no growth without social cohesion". And then the issue of employment, especially youth and women, becomes central. And with it that of training, and the supply of human capital. "We must strengthen the teaching of so-called 'STEM' subjects – science, technology, engineering and mathematics – to bring more young people to choose scientific paths for their professional careers". And to have a policy for women capable of freeing them from double domestic work, thanks to the provision of the necessary social services, as in the case of nursery schools.
If we do all this, with the necessary consistency, we will return to the "old" distinction between "good debt" and "bad debt". Depending on the use that will be made of the relative financial resources, thus obtained. “Debt – continues Draghi – can strengthen us, if it allows us to improve the well-being of our country, as happened during the pandemic. It can make us more fragile if, as has too often happened in the past, resources are wasted. " At the same time “it can unite us, if it helps us to achieve our goal of sustainable prosperity, in our country and in Europe. But debt can also divide us, if it raises the specter of moral hazard ”.
So what must be the characteristics of the "good debt"? Here are some options: the one that "serves to finance well-targeted public investment" is good. Which allows to absorb external shocks. The one “used to make an anti-cyclical policy”. This latter objective is of particular importance, as a support to monetary policy, especially when interest rates are so low that they can no longer be used for an expansionary policy. Although it must be immediately added that not all countries are capable of producing these policies with the necessary intensity.
"Sovereign debt that is not considered safe only partially allows it, because its issuance can lead to higher interest rates". The experience of the 2011 crisis shows how difficult it was to follow this path at the time, due to the increases in spreads. In recent years, this drawback has, at least in part, disappeared thanks to the policy of the ECB, which was able to operate by virtue of the fact that inflation “continued to be much lower than its primary objective. This has prevented the economies from falling into a vicious circle ”. Austerity policies to recover the resources needed to meet the higher costs of public funding. Which, in turn, accentuated the depression.
But for the future? It is foreseeable that the situation of low interest rates cannot be maintained, and then it will be necessary “to think about how to allow all Member States to issue secure debt to stabilize the economies in the event of a recession. The discussion on the reform of the Stability Pact, for now suspended until the end of 2022, is the ideal opportunity to do so ". With the aim of “improving the euro area's ability to respond to crises” and at the same time “further strengthening the independence of the ECB”.
There is no doubt that it is a real government program. That it also goes beyond this simple horizon is equally probable. In the longer term, the state – according to Mario Draghi – will have to acquire "an active role that is crucial" well beyond the threshold of public investment. To become more and more the center of gravity of a complex social organization necessary to accompany companies in managing a difficult transition phase, in which the development of new technologies and respect for great environmental times will dominate.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/lo-stato-avra-un-ruolo-cruciale-nella-ripresa-parola-di-draghi/ on Fri, 02 Jul 2021 12:37:03 +0000.