What they don’t tell us about the Recovery Fund

7 September 20204 years ago babelfish

Recovery Fund: facts, numbers and theses. Giuseppe Liturri's in-depth analysis starts from reading the Corriere della Sera …

We are returning from a deadly one-two launched by the signing of Corriere della Sera, Federico Fubini, between yesterday and today about the Recovery Fund, Mes and relations with Europe.

Let's proceed step by step, starting with Saturday's editorial.

Sergio Mattarella yesterday sent a message full of meaning to the Ambrosetti Forum in Cernobbio. "The crisis forces us to make massive recourse to debt and we must not compromise the future of the new generations with wrong choices ," said the President of the Republic. They “will look at how the resources have been administered. In the event of inactivity or little action, they will wonder why generations that have had such favorable conditions have failed to create essential infrastructures and structural reforms, necessary for the efficiency of the social and economic system, increasing only the mass of debt ». It couldn't be clearer.

Here the relief is not so much to Fubini, as to President Mattarella. It is regrettable that the President, representative of national unity, assumes that the "right" choices are those defined by the political agreement sanctioned during the European Council on 21 July. That is, focusing on environmental, digital and innovation transition, strengthening the growth potential as well as respecting the so far disastrous “ Country recommendations ”. On the one hand, a potentially large perimeter and, on the other hand, characterized by a high degree of discretion. The Commission will be the unquestionable arbiter of the admissibility of the national plans and, to do this, it will take 8 weeks from the moment of the formal sending of the plans. What if the country's priorities were other? What if we wanted to reduce the tax wedge? If we wanted to rebuild the areas of Central Italy, still under the rubble several years after the earthquake? What if we wanted to take care of hydrogeological instability? What if we wanted to invest in strengthening our education system, investing in the salary and qualification of teachers and school facilities? No one is touched by the doubt, not even the President, that what “necessary for the efficiency of the social and economic system” must be decided by us and not by Brussels, given the specificities of our country?

It is hardly necessary to recall that in the coming years Italy has the opportunity to spend over 300 billion euros made available by the EU. Over two hundred will come from the Recovery Fund, 28 from the Sure fund for support to workers, 36 for health expenditure from the European Stability Mechanism (if we want them) and then there will be traditional European funds, on which Italy will receive more how much it is called to contribute. This is also a result of the government and its newfound credibility in Europe: it would have been impossible if the country had been ruled by the Eurosceptic coalition in power up to 13 months ago.

Here Fubini makes two oversimplifications:

the 300 billion is the sum of loans (for the most part) and subsidies (less than 1/3). Adding them together is at least misleading.
To say that “traditional European funds”, therefore the 2021-2027 budget of 1,074 billion, will see us as net beneficiaries is at least risky. We have been net contributors since 2000 for a total sum of approximately 102 billion and, in the three-year period 2017-2019, we have been net contributors on average for approximately 7 billion per year ( Data from the State General Accounting Office, here from page 123 ). How can you imagine such a revolutionary reversal of sign that, in our opinion, could only get worse, given the exit of the United Kingdom and the increase in discounts in favor of some countries (Austria, Holland, Sweden, Denmark). We look forward confidently.

One third of the funds will be budget transfers, the rest will be loans on favorable terms and the total is worth 20% of the gross domestic product of 2020. To give an idea, the Marshall Plan between 1948 and 1952 was worth the 11th overall. , 5% of the Italian GDP of the time and changed the country.

They mix apples with pears. The macroeconomic effect of loans and subsidies is obviously different. But the most misleading aspect is the comparison between the Recovery Fund and the Marshall Plan. The first, however, provides for repayments, both for loans (by definition) and for subsidies, through higher taxes and contributions starting from 2021. Someone remembers repayments for the Marshall Plan, which in any case, was mainly composed of real and own grants? The comparison between the Recovery Fund and the Marshall Plan is totally out of place, as a well-documented intervention on the Politico.EU website reminds us , certainly not accused of anti-Europeanism.

If this is the lesson of the past, we just have to ask ourselves if we remember it. But to answer today is impossible. There are too many aspects that still remain to be clarified, those on which no explanations have been given. Almost nothing is known about the projects and priorities, beyond the titles. We only know that Minister Enzo Amendola was asked to solicit plans by the ministries and more than six hundred arrived: almost all old, some of which were already financed with national funds. It will not be easy to give them consistency. Wouldn't it have been better to start by indicating a few precise guidelines from the center, perhaps already in June or July, when the European agreement was already on the horizon? In Spain, for example, the Recovery Plan started with a call from the government to all large companies – private and public – to ask them which digital projects could have the greatest impact for growth.

Instead the guidelines are there and are those previously listed and well defined in the agreement of 21 July. Have we not been touched by the doubt that, when the ministries are asked for plans, the real needs of the country emerge, perhaps not inscribed within the perimeter designed by Brussels?

Nor is it very clear what form the reforms that must accompany the Italian Recovery Plan will take. Under the conditions set out in the July agreement in Brussels, they must relate to civil justice and the efficiency of the administration. They should enter the project to be sent to the European Commission in just over a month, but these topics are hardly mentioned in the political world and in the country. The enabling law on the reform of civil justice has been lying in Parliament for some time, for example.

What is not clear about what the Council agreed on this matter (“in the evaluation the highest score must be obtained for the criteria of consistency with the country-specific recommendations”)? All recommendations, not just the one relating to civil justice and the efficiency of the PA. No document speaks only of civil justice. And, if we look closely at those recommendations, the potentially recessive potential emerges, as we have already experienced on our skin since 2012.

Going from Sunday to Monday, the script does not change. Too many things that don't add up. Let's examine them.

It will not be necessary for Italy to present by mid-October a plan already completed on the 209 billion of Next Generation EU, also because too many details remain to be specified in Brussels. The most important is apparently technical in nature but can have profound financial and political implications. The main part of «NextGenEU», the Recovery Fund, will not be in direct budget transfers but in loans. At almost zero rates, repayable in thirty years or more, but still loans. For Italy this part is worth about 125 billion euros in the coming years.

Nobody asked Italy, or other countries, to present "completed plans" in October. There has always been talk of drafts for discussion, also because the regulations that will govern the functioning of the Next Generation EU will not be ready before December. The only certain date for sending the formal plans is April 2021, as also confirmed by Gentiloni. From there, it will take 8 weeks for the Commission to evaluate and submit to the Council for approval within 4 weeks.

The Italian government has therefore asked the European Commission a question recently: how should those loans be treated on an accounting basis? If they were simply added to the calculation of the public debt – combined with the 28 billion of the European fund Sure for work – we arrive at 152 billion more in charges. It is 9% of the Gross Domestic Product, which can become 11% if the health loan from the European Stability Mechanism (ESM) is also added. The government therefore wants to know if those sums must be entered in the normal accounting of public debt – making it rise much more, when already this year it will be around 160% of GDP – or can they be treated separately. Italian public finance documents today, for example, indicate in an asterisk at the foot of the page that approximately one percent of the debt is due to Italian loans to the ESM, for the bailout of Greece and other countries a decade ago. In this case it would be a question of clearly indicating to investors, in theory, that a part of the enormous debt is of a different nature and in itself more sustainable than that contracted on the market. But this remains an open game for the next few weeks, one of the most delicate.

Fubini centers on a relevant theme, but ends with apodictic conclusions. Finally, he focuses attention on the debt nature of this money that will come from Brussels. And this is certainly a note of merit, in the prevailing panorama of stories that describe money falling from the sky or growing like sequins in the field of miracles. But, in making a difference, he shoots himself in the foot by claiming that that debt "is in itself more sustainable". And who said it? A debt is sustainable if the inflows exist to repay principal and interest. Speaking only of interest: just a few (hypothetical) hundreds of millions less a year of interest than a thirty-year BTP is enough to affirm that the EU loan is more sustainable? Speaking of capital: it is true, the EU loan is long-term and therefore does not require intermediate refinancing, with the risk of being in a liquidity crisis. They forget that we smoothly roll over hundreds of billions of debt every year. It is forgotten that the debt issued and renewed sine die by the Central Bank, as has been happening since 2015 with purchases made with Quantitative Easing, no longer has liquidity risk, and we are talking about just under 500 billion. It is forgotten that, paradoxically, liquidity risk will arise with European loans that cannot be renewed. Extremely speaking, even a 12-month Bot (even more so a 10 or 30-year BTP), repurchased in perpetuity by the ECB is more sustainable than an EU loan, which instead will have predefined repayment installments starting from 2028.

Pending clarification of this point, the government is taking steps forward in defining the guidelines of its Recovery plan. The main large public and private companies have already been heard about the potential projects with a multiplier effect for growth. The meetings remained reserved above all to avoid repercussions on the price lists, always possible given the size of the sums involved. But now the first documents are ready in draft form. The meeting of the CIAE, the European Affairs Interministerial Committee, attended by the premier and all the main ministers, is scheduled for Wednesday, which should approve and send the first policy plan to Parliament. Subject to changes at the last, the text should indicate six major investment areas and six reform chapters. The former concern digitization, innovation, infrastructure, the reduction of polluting emissions, education and research. The second – the major reform issues – should include the public administration, the efficiency of the judicial system, the labor market, research, training and the tax authorities.

Investments in all the areas listed are welcome. The only question is what is the advantage of having them financed by the EU rather than by the markets. Instead, the wrists are shaking to read the list of reforms. We are well aware of the economic effects of the Commission's "reforms": wage deflation and asphyxiated growth. Weren't 8 years enough to see the effects? These are exactly the same requirements that make the EU the lowest-growth advanced economic area in the last 20 years, not to mention the damage inflicted on Italy. Do you really want to continue with the same recipes?

The two lines, investments and reforms, should be linked in part by the same projects. For example, one of the strengths in the proposals to modernize the state machine is the migration to the cloud – the digital "cloud" with very fast computing capacity – of the data of the 23,000 Italian administrations today dispersed in eleven thousand "data centers" which very often they are old, inefficient and unable to communicate with each other. The transition of the state's computer memory to the cloud reduces costs, potentially increases office productivity, but requires investments of several billion that can be covered with the Recovery Fund.

That's all? Do we need EU loans to network databases? It is hard to stay serious.

Also on the front of what yesterday at the Ambrosetti Forum the Economy Minister Roberto Gualtieri defined "social infrastructures", the government is thinking of synergies between investments and reforms. The billions of NextGen EU should help and finance the transition to full-time school throughout the South (today it concerns only a quarter of children); they should raise the coverage of nursery schools to the European average (about 33 places for every 100 newborns up to 36 months), to give more job opportunities to mothers; and they should strengthen employment centers in skills and technologies. In terms of the environment, a central project concerns the storage and transport of hydrogen also to the rest of Europe and should involve both Snam and Enel.

Exactly the list of expenses that we have been asked to cut in 25 years of primary public budget surpluses. We neglected investments in those areas precisely to obey what requested by Brussels, only to hear recently from Gentiloni that the Stability Pact was applied too quickly in 2012 and it was a mistake.

After Wednesday, the next steps arrive at the end of September with the update note to the accounts and in mid-October with the first sending of guidelines to Brussels. But the presentation of the detailed projects probably won't arrive until January. The timing of the first disbursements is therefore also postponed.

Commissioner Paolo Gentiloni at the hearing in Parliament on 1 September had already said everything on the specific point of time. And we anticipate a probable novelty: the 10% advance will only concern subsidies (about 81 billion) and not also loans (about 125 billion). So no earlier than June 2021, only 8 billion and not 20 billion could arrive.

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/che-cosa-non-ci-dicono-sul-recovery-fund/ on Mon, 07 Sep 2020 13:20:18 +0000.