Next Generation Eu: financial structure and economic effects
Next Generation Eu: purposes, scenarios and unknowns. The analysis of prof. Francesco Vatalaro, Professor of Telecommunications at the Engineering Department of the "Mario Lucertini" Company of the University of Rome Tor Vergata
While the COVID-19 pandemic continued to rage around the world, a difficult political agreement was reached between the governments of the member states on the economic recovery package and the European budget at the extraordinary European Council of 17-21 July 2020. however you want to judge it, it has a historical significance for the European Union. Today, a year and a half after that agreement, when the implementation of the national plans is starting with the publication of the first calls for tenders, in public comments, including those of experts of undoubted competence, we note a strong gap between those who strongly support the plan of measures, almost attributing it a thaumaturgical power for Europe and those who, on the other hand, direct lashing criticisms at its address, which are also perhaps on the whole excessive.
Without prejudice to the fact that on a multi-year economic-financial plan of such proportions a justified judgment based on quantitative data cannot be expressed until a few years, when the effects on the economy of the European continent begin to be evident, it is not inappropriate to seek henceforth to examine what is true in the positions of supporters and detractors, also in order to ask oneself if there is still some room, even if minimal, for any corrections and improvements.
In the following I will try to examine the most relevant aspects of the European plan ("NGEU") and its Italian declination ("PNRR"), retracing some of the favorable and opposite positions, with the aim of providing a broad, certainly not complete, picture. and to put forward some limited proposals for action. In fact, such a broad and multi-year plan should not in any case be thought of as a high-speed train launched on a completely pre-ordered route, but should include elements of adaptability; in other words, it should be possible, and therefore contemplated – by Governments and Parliaments, with the support of the European Commission – improvement interventions in progress, if not on individual projects at least by acting promptly where necessary on the simplification of regulatory and regulatory systems both European and national. All this does not refer to the so-called "reforms with the PNRR" (wanted by Europe) but to "reforms for the PNRR" (indispensable for Italy) about which little is said and which would be of central importance in order not to risk failure of the plan.
In the following, after having briefly introduced the reasons why the economic crisis deriving from the COVID-19 pandemic presents undoubted characteristics of novelty, as well as seriousness, we describe the characteristics of the Next Generation EU (NGEU) plan which has its roots in agreement of July 2020 and the "pros" and "cons" that seem connected to the approach decided for this plan are examined. We will then proceed to summarize the national recovery and resilience plan (PNRR), proposed by the Italian government on the basis of the guidelines of the European Commission and definitively approved on 13 July 2021 with an executive decision of the European Council. Again, I will try to highlight the good points and potential weaknesses. In concluding, I will try to put forward some minimal proposals to circumvent the difficulties that are already looming on the bumpy path of the Italian PNRR.
AN UNPRECEDENTED ECONOMIC CRISIS
The health measures adopted in many countries in 2020 in response to the COVID-19 pandemic have led to a more or less extensive and prolonged suspension of production in many industries of products and services. To this suspension was added the sudden interruption of the international supply chains of raw materials and semi-finished products. In fact, since all the continents – hit in waves by the pandemic – have experienced a similar situation, exports have also been seriously damaged, with effects of further and generalized reduction of production capacity which in Italy, the first country to be hit in Europe, it is made to feel with particular severity. According to ISTAT, in fact, the gross domestic product of our country in 2020 fell by 8.9% while, again with respect to GDP, the public deficit rose to 9.6% and the public debt reached a record level of 155. , 6%. In the meantime, the overall tax burden (amount of direct, indirect, capital account taxes and social contributions in relation to GDP) also increased during the year, reaching 42.8% compared to 42.4% the previous year. [1]
The economic crisis produced by the pandemic presented itself with different characteristics from the previous "subprime" crisis of 2008, due to an oversupply in the US real estate market, which first caused the inability to repay mortgages, then widespread banking crises that spread all over the world and finally, in 2012, the sovereign debt crises of EU Europe due to the need to safeguard national banking systems.
As a result of the 2020 pandemic, however, if the shock at the beginning occurred on the supply side, as mentioned in terms of shortage and not excess, it soon also involved the side of demand which cooled down , with the consequence of an unprecedented screwing up of the economies, at least in relation to the type of crisis on both sides. The total blockade of national economies has pushed States to intervene with measures to support businesses and wage integration, which, however, even when available, were often largely insufficient to bring incomes back to pre-crisis levels in discontinued activities, in particular in the widespread sectors of small retail businesses. There has therefore been a sharp drop in consumption and bankruptcies in a chain of businesses, distributed throughout the territory, and of freelancers. In some sectors – for example in transport, hotels, restaurants, and more generally in tourism – consumption did not recover even at the end of the peak of the emergency, both due to fears of contagion and a deep-rooted sense of uncertainty. in the population. Private investment collapsed, despite the suspension of the EU rules on the control of public deficits and debt (temporary freezing of the Fiscal Compact) which allowed central banks – including the ECB – to create abundant liquidity which, however, remained largely withheld by the banking system, while only a relatively small share reached the market, due to the mutual lack of trust.
As documented by the Bank of Italy, [2] in the first half of 2020 private non-financial incomes recorded the strongest contraction in the last twenty years, only partially countered by government support measures. The decline was 8.8% compared to the first six months of 2019, much greater than that recorded in the most acute phases of the financial crisis of 2008 (-5.2%) and that of sovereign debts in 2012 (-3 , 4%). The direct consequence of this contraction was the drop in consumption, which fell by 9.8%.
This has resulted in an accumulation of private savings, particularly in a country like Italy which traditionally ranks among the first in the world in this ranking. In the autumn of 2020, coinciding with the second wave of the pandemic, the increased concern of Italian families and family businesses has therefore provided a new impetus to the race to save. The data presented by ABI [3] showed an increase in liquidity on deposits year on year: deposits from resident customers recorded, in September 2021, a trend change equal to + 7.0%, with an increase in absolute value on a annual amount of over 117 billion euros, bringing the amount of deposits to almost 1,800 billion. To better appreciate the consistency achieved by Italian savings, just think that the GDP, which at the end of 2019 was 1,787 billion euros, had suffered a fall higher than the European average, i.e. 9% compared to the 6.5% decrease in average of the Economic and Monetary Union. The convergence in 2020 of the two items, liquidity on deposits (growing) and GDP (decreasing), is explained by growing fears for the future, on the one hand, and by restrictions on economic activities, on the other. In 2021, having removed numerous blocks to production activities and restrictions on the mobility of people due to the improvement in the health situation due to the advent of vaccines, GDP started to grow again while the savings of families and family businesses remained at very high levels. tall. Much savings are now held in bank current accounts, immediately available for consumption and potentially for investments.
Not only the extent of the pandemic crisis, but also its anomalous nature and international character undoubtedly justify a common response from the States, at least at the European level: in fact, the European Commission and the Member States have reacted with a considerable degree of cohesion, especially when compared with what had been experienced in the crises of the recent past. As Presidents Draghi and Macron wrote in the Financial Times at the end of December 2021: [4] “ The European Union has often been accused of doing too little and acting too late in dealing with crises. The collective response to the recession caused by Covid-19 was neither too little nor too late. Rather, it demonstrated the importance of acting in a timely and courageous manner. And it confirmed the advantages of coordination in policies between countries and institutions . "
Therefore, once the emergency aid phase was over, it was a question of planning measures aimed at restarting the economy of the Continent, without neglecting among the priority objectives is that of overcoming ancient inefficiencies, through a plan of structural reforms, especially in some countries of the Southern Europe like Italy, is to address the climate and environmental crisis with renewed energy which in the meantime was strongly reaffirmed through two important meetings, the G-20 Summit in Rome dedicated to " coronavirus and climate change " at the end of October 2021 and, soon after in Glasgow, the COP26 United Nations world conference on climate change.
In this context of strong health, economic, social and climatic criticality, the European Commission's plan called Next Generation EU (NGEU) was born and structured.
THE FINANCIAL STRUCTURE OF THE NEXT GENERATION EU PLAN
Next Generation EU is the name given to a range of measures, for a total of 750 billion euros (at 2018 prices), which is based on a political agreement between the member states in the summer of 2020 to go beyond the ordinary EU budget , set at 1.074 billion euros for the von der Leyen presidency of the European Commission. While for some, including the European Parliament itself, the agreement reached by the Council would not be ambitious enough, others consider it a remarkable success that European leaders have managed, in the relatively short period of a few months, to unanimously propose a recovery plan and its financing mechanism.
Indeed, the NGEU plan encompasses several objectives, aiming on the one hand to address the socio-economic consequences of COVID-19 and induce the resumption of GDP growth, and on the other hand to stimulate the transformation of the EU to make it more resistant to future unpredictable shocks. , through its main development policies, the “Green Deal” and digital transformation. Designed as an exceptional and temporary recovery tool, the NGEU included in the EU's 2021-27 Multiannual Financial Framework (MFF) is divided into seven programs (Figure 1).
The NGEU includes the extension of existing programs, such as Horizon and InvestEU, and other newly created programs that channel most of the resources foreseen in the plan. The largest of these programs, which absorbs 90% of the NGEU, is the Recovery and Resilience Facility (RRF) of 672.5 billion euros at 2018 prices (723.8 billion at current prices), to be made available to the members in the form of subsidized loans (" loans ") for 358.5 billion and grants for 314.0 billion. Access to RRF resources is conditioned by the proposal of projects (recovery plans), which must be presented by individual Member States and meet various conditions (expenditure control, compliance with spending conditions, introduction of structural state reforms, etc. ). Furthermore, the European Council established that the funds allocated under the RRF must be committed in the years 2021-23 and fully disbursed by the end of 2026.
The European Commission finances the € 750 billion package with recourse to market loans: to provide guarantees to enable capital markets to be tapped, the "own resources" ceiling [5] – that is, the amount to be requested every year to member states to finance EU spending – temporarily increases from 1.2% to 2% of Europe's gross national income (GNI).
The repayment of the obligations contracted by the EU must be completed by 2058; consequently, the temporary increase in the levies from the budgets of the Member States foresees the same time horizon. Given the expected repayment of the loans by the Member States, the Commission will have to have the necessary resources to repay the amount of the non-repayable grant component included in the NGEU to the capital market. The European Council has therefore authorized the levy of additional own resources: in 2021 the Commission has already made proposals for a carbon border adjustment duty ("Carbon Border Adjustment Mechanism") and a digital tax ("Digital Levy") for the purpose of their introduction no later than 1 January 2023. The Council also invited the Commission to present a revised proposal on the EU Emissions Trading Scheme, extending it to the aviation and maritime, and to work on the introduction of other own resources, which could include an EU Financial Transaction Tax.
PRELIMINARY ESTIMATES ON THE ECONOMIC EFFECT OF THE PLAN
The European Commission and independent agencies have conducted econometric studies to predict the effects of the new measures on the continent's economies. It should be noted that these are difficult analyzes, not only due to the particular nature of this economic crisis but perhaps, above all, because it is objectively impossible to model all the parameters that intervene in the phenomenon under consideration, specializing them for countries with development conditions that are sometimes very different. before the advent of the pandemic.
According to a recent study by the German Institute of Keynesian School IMK (Instituts für Makroökonomie und Konjunkturforschung), [6] " the simulations show, firstly, that if the funds are actually used to finance additional public investment (as planned), the Stocks of public capital will increase significantly across the EU during the RRF period. Secondly, in some particularly affected southern European countries, the RRF would compensate for a significant part of the production lost during the pandemic. Thirdly, given that the GDP gains due to the RRF will be much stronger in the (poorer) countries of southern and eastern Europe, the RRF has the potential to reduce economic divergence. Finally, as a direct consequence of the increase in GDP, in 2023 the RRF will lead to a reduction in the public debt / GDP ratio between 2.0 and 4.4 percentage points below the reference value for Southern European countries . "
Figure 2 highlights the RRF grants awarded to each Member State as a share of its 2019 GDP. Significant differences of macroeconomic importance emerge between Member States. For seven of them (Croatia, Bulgaria, Greece, Slovakia, Romania, Portugal, Latvia) the grants from the RRF are intended to provide a boost of more than 1% of GDP every year for six years. For nine others (Lithuania, Spain, Cyprus, Poland, Hungary, Italy, Estonia, Slovenia, Czech Republic) the annual impulse provided is approximately 0.5% or higher. For all others, subsidies are of rather marginal importance (about 0.25% of GDP per year or less). All Member States of the first two groups are located in Southern or Eastern Europe. In the case of Italy, the estimated average annual impact on GDP is around 0.6%.
[1] ISTAT statistics: https://www.istat.it/it/files//2021/09/CS_Conti-economici-nazionali_2020.pdf
[2] L. Infante, et al. , "Economic and financial accounts during the COVID-19 health crisis", Bank of Italy, Note COVID ‑ 19, 14 January 2021, https://www.bancaditalia.it/pubblicazioni/note-covid-19/2021 /covid_14gen21_financial_and_economic_ accounts.pdf
[3] ABI Research Department, “Monthly Outlook. Economics and Financial Markets-Credit ", October 2021, https://www.abi.it/DOC_Mercati/Analisi/Scenario-e-previsioni/ABI-Monthly-outlook/Sintesi%20ottobre%202021%20st.pdf
[4] M. Draghi, E. Macron, "The EU's fiscal rules must be reformed if we are to secure the recovery", Financial Times, 23 December 2021, https://www.governo.it/it/ Articolo/ ue -intervention-of-dragons-and-macron-on-financial-times / 18890
[5] Council Decision (EU, Euratom) 2020/2053 of 14 December 2020 on the system of own resources of the European Union, GURI 15-12-2020.
[6] S. Watzka, A. Watt, “The Macroeconomic Effects of the EU Recovery and Resilience Facility: A Preliminary Assessment”, IMK Policy Brief No. 98, October 2020.
(First part)
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-struttura-finanziaria-ed-effetti-economici/ on Fri, 21 Jan 2022 07:31:07 +0000.