Nicola Rossi is a professor of political economy at the University of Rome Tor Vergata and a board member of Istituto Bruno Leoni, a policy think tank. Alberto Mingardi is executive director of Istituto Bruno Leoni, a presidential fellow at Chapman University and an adjunct scholar at the Cato Institute.
The Italian government should drop its opposition to taking out loans from the European Union’s bailout fund.
Known as the European Stability Mechanism (ESM), the fund has the benefits of being available now, when it is needed to respond to the COVID-19 pandemic. Other instruments, such as eurobonds or an EU recovery fund, will not be available for some time, whatever agreement is reached among Europe’s grandees.
What Italy needs now is the capacity to respond to an emergency, not money that will come later to be splashed on whatever pet projects officials may have. Using funds meant for an emergency for anything other than an emergency is fiscal demagoguery — alas, fiscal demagoguery sells well in the Italian political market.
The creativity of Italian economists and politicians is running unbridled. A substantial enlargement of the “entrepreneurial state” seems to be in order, together with previously unimaginable infrastructure investments, from run-of-the mill construction projects to all matter of “green” efforts.
In Rome and in provincial capitals, more than 400 experts have been gathered into a plethora of “task forces” and tasked with fantasizing about how to spend the funds that, due to the pandemic, should pour into the country.
Wishes are potentially infinite, resources are not. In real life, economic constraints help people sort their wishes in order of priority, so resources can be used wisely. If Italy were having a rational calculation, the order of the day should be clear: Strengthen the country’s healthcare infrastructure to make life with the coronavirus more manageable.
The money that Italy borrows from the ESM may not be enough to support endless nationalization, but it would be of undoubted help in dealing with what Italy actually needs. Why then is the Italian political class resisting them so strongly?
The answer commonly given is that Italy’s problem with the ESM is that its money usually comes with strings attached. During the last decade’s financial crisis, countries that used the fund were required to implement structural reforms and put in place austerity programs. This time around, the most likely condition will be that money disbursed by the fund be spent on matters related to health care — hardly something to be opposed.
A look at the calendar offers another possible reason for Italy’s reluctance.
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The International Monetary Fund projects that Italy’s GDP will plunge by 9 percent this year. It also estimates that measures taken by the government to counter the epidemic will produce a budget deficit of 8 percent and that Italy’s debt-to-GDP ratio will rise from about 135 percent today to 155 percent by the end of the year.
That should be doable. With measures already announced — including bond buying by the European Central Bank, the European Commission’s SURE program and, if common sense prevails, the use of the ESM — Italy will have to sell less debt on the financial markets than it would have had to if the virus hadn’t arrived.
The question then is, what happens next? Compared with 2020, it is reasonable to expect the economy to rebound in 2021, but it is unlikely that Italy will fully recover, due to the over-regulation and rigidity of the its economy.
Meanwhile, the EU’s emergency measures, including a relaxation of the fiscal targets under the EU treaties, cannot be expected to last forever. The result: 2021 will be the year in which the law of gravity returns, at least when it comes to Italy’s finances.
This explains why Italy’s political class is so interested in things like the Recovery Plan or the long-standing idea of eurobonds, which cannot possibly come into being before 2021.
With a general election due in 2023, and very possibly occurring well before then, fiscal reality would be bad news for Italy’s politicians. What better than a spigot of newly arrived European funds that keeps public spending on the rise as the country heads to the polls.
Italy is in very serious trouble. When the coronavirus hit, the country had yet to fully recover from the 2008 financial crisis. This new shock will likely roll back efforts businesses have made over the last 10 years to get back into the black. It’s difficult to imagine that they will be able to quickly start investing.
We need to prepare for years of very slow growth at a time when the government’s ability to ramp up spending will be small if not non-existent.
The sad truth is that Italy needs exactly what it needed before: structural reforms. But such reforms are hard to imagine with a political class that remains in office by opening the public purse.
We are coming to a point in which the interests of the country and Italy’s political class are becoming seriously misaligned.
If Italy says “no” to the ESM, as a way to pursue irresponsible spending, the consequences will be dire. The country could easily find itself forced to turn to the ESM in a few years — not because of the coronavirus, but because it did not succeed to manage its books.
This time, however, any assistance will come with painful conditions: draconian austerity and an economic management plan dictated by the troika. And this time, there will be no alternative.