Because the reform of the EU Pact cannot start from the obsession with debt

8 December 20235 months ago babelfish

The often abstruse debate on the reform of the EU Pact and the acceptable approach of Minister Giorgetti. The analysis of the economist Ugo Arrigo

THE REFORM OF TAX RULES IN THE EU FROM A DIFFERENT PERSPECTIVE

To fully understand the debate at European level on the reform of tax rules for the years to come, it is worth doing a small experiment. Let's imagine an insomniac gentleman who wants to find a drastic remedy for his problem. He decides to give himself a very specific rule: tonight he will fall asleep exactly ten minutes before the time he fell asleep yesterday, tomorrow he in turn will fall asleep ten minutes earlier than today and so on in the following days. How should we interpret this strategy? Simply as a failed and senseless strategy. In fact, everyone knows that sleep is an objective that cannot be pursued directly, but only as an indirect and unintentional effect of other actions, for example that of going to bed. We can therefore decide to go to bed but we certainly cannot decide to sleep…

Final states that cannot be directly pursued, at the risk of not achieving them, are called 'essentially secondary states' by the philosopher Jon Elster. A work of art, for example, cannot be pursued directly, a writer cannot decide to write a masterpiece, he can only decide to write a novel which, under certain conditions and in a certain context, perhaps can become a masterpiece.

“Certainly a work of art is an intentional product, but only in the sense that a work of art is produced by means of an intention, but not thanks to it. To use Jon Elster's terminology, the work of art is produced only as an essentially secondary effect of actions that necessarily aim at the realization of other specific ends: if I want to produce a corkscrew or a bookcase or a table, I know what I have to do. If I want to produce a work of art, I don't know…

Of course, the products or states that are essentially secondary effects are very heterogeneous, let alone all works of art: Elster, for example, is interested in cases of a completely different kind. If I want to produce in myself a state of forgetfulness (if I want to forget something) I cannot consciously and intentionally aim at this goal; I will have to aim for another goal, for example to be interested in a film, where my primary intent will have to be to be interested in the film and, perhaps, as a secondary effect, I will get distracted and forget what I want to forget. If I want to obtain religious faith, I can go to church and perform all the rites that believers perform, but it would not make sense to say that I set myself the goal of believing and that I obtained it thanks to this intention of mine. The same goes for insomnia: it is a failure, if you suffer from insomnia, to intentionally and consciously aim for sleep, you have to aim for something else and hope that sleep will come ”.

GIORGETTI'S HEARING ON THE REFORM OF THE EU PACT

At this point we can reveal the mystery that hides behind our metaphor: the sleepless lord is Europe, the insomnia is the high and worrying public debt/GDP ratio and the rule of falling asleep first period after period is simply that that we would like to introduce for its automatic reduction over time. It rightly leaves our government perplexed and the Minister of Economy and Finance Giorgetti recently spoke about it critically in a parliamentary hearing:

“The provision of further constraints compared to what was proposed by the Commission could lead to an outcome that is not fully compliant with the objectives of the reform as outlined starting from the Communication of the Commission itself: that is to say a structure characterized by simplicity and a greater balance between the objectives of economic growth, promotion of the ecological and digital transition, as well as sustainability of public debt"

There is essentially no single objective but rather a plurality of objectives and the reduction of the debt burden cannot be pursued while neglecting that of economic growth. Furthermore, even economic growth, not just debt sustainability, is an essentially secondary state, it is the consequence of a set of other factors and cannot even be achieved directly. Europe's insomnia turns out to be quite complicated: the sustainability of public debt is an essentially secondary state which depends strictly on economic growth, on how much nominal GDP increases over time, which is the denominator of the ratio. And economic growth is also an essentially secondary state: no one can decide to make the national economy grow more and, following this decision, make it happen. Maybe this was possible…

THE ISSUE OF DEBT AND RELATIONSHIPS WITH GROWTH

And let's not talk about the debt, which is the numerator of the ratio. The stock of debt is a certain fact, an objective statistical number, however what counts here is its variation over time, year after year, which is essentially the annual deficit of the public accounts. To slow down the growth of the debt stock, it is necessary to reduce the public deficit and therefore reduce public spending and/or increase revenues, therefore tax revenue. Public spending can be reduced in budget maneuvers but this reduction could reverberate on economic growth, reducing it in turn. And with regards to tax revenues, only the rates are decided, certainly not the revenue, which depends on the rates but also on the taxable amounts to which they apply, which strictly depend on economic growth…

So let's try to sort things out:

The economic growth of a country is essentially a secondary state, it cannot be decided by governments and obtained as it is decided.
Economic growth determines the dynamics of tax revenues and therefore also makes revenues an essentially secondary state: if their growth is directly pursued by excessively or too rapidly increasing tax rates, a recession can be produced which can cause revenue to fall when instead the objective was to increase it.
The essentially secondary status of tax revenue also makes the public deficit secondary and with it also the annual variation in the debt stock and therefore also the debt/GDP ratio…

In practice it is a chain letter of secondary states: it can be addressed starting from the last of the links, the debt/GDP ratio, but with this approach the chain remains ungovernable. On the contrary, it must be addressed starting from the first ring, that of economic growth, the only secondary state that has an original and non-derivative character. If the puzzle of growth is solved then, by arranging the first link, even the linked ones will fall into place very easily and without the need for the rigid rules of the insomniac who claims to fall asleep on command. Unfortunately, those in Europe who propose rigid rules and automatisms must never have suffered from insomnia nor have read the writings of Jon Elster. Giancarlo Giorgetti is therefore right when he argued in Parliament "With respect to rules that are impossible to maintain, I don't think seriously we can say yes".

(Excerpt from an article published in Il Sussidiario )

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/riforma-patto-ue-debito/ on Fri, 08 Dec 2023 06:43:54 +0000.