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The Excess of Current Expenses Risks De-Legitimizing the Axis Between Draghi and Macron

By Ignazio Angeloni @

Read the original piece in Italian HERE.

(Francesco Fotia / AGF)

While our political forces are dedicated to their favorite sport - palace intrigues, in this case the highest - the economic bulletin is turning for the worst. Or rather, it is moving towards a more difficult and risky condition for our country, despite its successes in dealing with the virus. Let's see why. First of all, it is increasingly evident that inflation risks in the post-pandemic economy have been underestimated. The increase in energy prices - cyclical, but also structural and geopolitical - is combined with supply restrictions in determining ideal conditions for an inflationary flare-up. The post-Covid economy and society will be different from the past. We do not know exactly how, but it is certain that new habits, lifestyles and work styles, new consumption and production patterns will prevail. Structural and sectoral changes of this nature stimulate price increases that easily become persistent. The ECB insists that the phenomenon is temporary, but its argument is weak: even if in a few months inflation should steadily return to 2%, something about which it is legitimate to have strong doubts, it is now clear that current conditions are not conditions in which to maintain negative interest rates. In recent weeks, expressions of opinion in this sense have also been received from within the Central Bank, albeit still partial and nuanced. Velas Economic growth remains strong, especially in Italy. But a misunderstanding needs to be cleared up. The growth in 2021 (over 6%) and that forecast for 2022 (4%) are a re-emergence compared to the fall of 2020, not a repositioning of the Italian economy on that higher structural growth path on which the forecasts are based. of the government and the National Recovery and Resilience Plan (Pnrr). To achieve that structural increase, which is crucial for the future of the country and for debt sustainability, especially in the perspective of a rate hike, the 51 conditions already met by Italy to obtain the first tranche of European funds are not enough. The timely and complete implementation of the investments and reforms of the Plan will be necessary. A whole thing to come. And here we come to the mother of all Italian worries: public finance. On these columns we had already reported months ago that the current expenditure of the public budget programmed in the April Def, then in the October NaDef, and finally in the budget law, increased too much to ensure the sustainability of the massive public investments envisaged in the NRP. An alarm today also shared by other observers. What is still missing from the government's program is the concept that the reconversion of public intervention, in other words the budget reform, must be comprehensive (more investment, less unproductive expenditure), not partial (more investment, and otherwise it is whatever it is). It is important that clear signals are received from the government in this sense at a time when there is a strong support for upward corrections in expenses and the renewal of refreshments and rain support. There is no doubt that Prime Minister Mario Draghi and Economy Minister Daniele Franco are well aware of the future risks of public debt. But it is not so obvious that the political forces and general opinion, perhaps misled by the widespread illusion that everything has become possible and all bonds have disappeared, have realized this. It's up to them then to ring the alarm bell. But it is not so obvious that the political forces and general opinion, perhaps misled by the widespread illusion that everything has become possible and all bonds have disappeared, have realized this. It's up to them then to ring the alarm bell. But it is not so obvious that the political forces and general opinion, perhaps misled by the widespread illusion that everything has become possible and all bonds have disappeared, have realized this. It's up to them then to ring the alarm bell.

Before Christmas, with all the weight of their authority, Draghi and French President Emmanuel Macron intervened in the debate on the new budget rules that Europe will have to define in the coming months. In an article published in the "Financial Times" taken up by all the international press, they warned against restrictive rules that hinder the realization of public investments that European plans provide for. The article has a political character, but also refers to a technical document with proposals, drawn up by economists of the two governments. We reserve the right to return to the latter at a later time. However, the article immediately deserves a separate reflection.

In today's Europe that is healing, changing and maturing, the intervention of the two Presidents strongly reaffirms the historical link between Italy and France. It is not risky today to hypothesize the evolution towards advanced forms of political integration between the two countries; Draghi and Macron have already expressed themselves in this sense. It is worth remembering that the initiative takes place in a millennial groove. Since the conquest of Caesar, and even more so after the defeat of the Roman legions in the Teutoburg Forest (9 AD) has fixed forever on the Rhine the border between Romanized and Germanic Europe, the destinies of the two countries, characterized by their communes linguistic, cultural, humanitarian and ideal traits have always come together. Italy's political identity and its own national unity owe a great deal to France: it is no coincidence that a flag is flying on the highest flagpoles of both countries. Draghi and Macron's initiative has particular value also because it reaffirms this heritage and enriches its content.

Having said that, it is legitimate to express some reservations on how the initiative fits into the current debate. Published - for some reason - in a British newspaper, for excluding other participants (especially Germany) from the pronouncement and presenting the arguments fairly unilaterally (the reference to "keeping recurring public spending under control through reasonable structural reforms" is rather generic), the message risks being seen more as a partisan opinion than as an effort to arrive at a common and shared European line.

A few more substantial considerations also apply. In the twenty years of the euro, Italy and France both had an average level of current public expenditure in relation to GDP that was higher than the eurozone average, and for lower per capita GDP growth. Not exactly the performance that empowers teachings on how to regulate the budget. Both countries entered the pandemic crisis with current expenses in excess of the average of the others, and this situation is not expected to change in the near future.

Italy and France have the will and the political capacity to jointly express a very influential position in the negotiations to come. But the solution will necessarily be a compromise that takes into account the sensitivities of all. Provisions governing the finances of states, hopefully simpler and more transparent than those of the past, will continue to exist, and it is good that this is the case. Especially for countries, like ours, whose future stability depends on the existence and compliance with those rules.

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