Debt in three southern European countries

Sottotitolo: 
The negative performance of Italian GDP is explained by lack of investment. Increase of public investment would have given much better results.

From recent news it seems that le procedure for excessive debt will shift at the end of summer, when the Italian government will present the financial bill for next year. It seems a wise decision, since in this period Bruxelles has to deal with a Brexit which will be an hard Brexit. Moreover Tria, minister of Treasury, is probably right when he says that Italian deficit will be this year lower (2,1) than that forecast by the European Commission (2,5).  So it is better to wait.

The subject of the dispute is complicated, but the reader may get a first idea looking at the debt-GDP change in last years in Italy and, as comparison, in the two Iberian countries:

Years

2014

2018

2020*

Italy

131,8

132,2

135,2*

Portugal

130,6

121,5

116,6*

Spain

100,4

97,1

95,7*

 *European Commission forecast              

As one can see, while (mainly) Portugal and Spain have reduced the debt ratio, in Italy, where it is higher, the ratio has slightly increased from 2014 to 2018, and moreover the Commission forecasts a stronger increase for the next year. Has been Italy more lax in fiscal policy? The answer is negative. The cumulative deficit 2013-2018 is:

                                     Italy 12,6 – Portugal 17,1 – Spain 20,4

One need to look not at the debt (numerator) but to the GDP (denominator):                                            

Nominal increase in GDP: Italy 9,5 – Portugal 18,4 – Spain  17,8  

Italian growth was half that of the two Iberian countries. In Clinton’s time it would have been said: “it is the economy, stupid, not the debt”. Now an analysis of this goes far beyond an article, but it may be useful to look at two components of national accounts:

Nominal increase in investment: Italy 14,1 – Portugal 37,1 – Spain 33,3

Nominal increase in export:        Italy 20,5 – Portugal 30,6 – Spain 25,3

As one can see export performance of Italy has been inferior to that of Portugal and Spain, but slightly; moreover the lower growth of import (because of a lower growth of GDP) brought the current account balance into surplus, bringing into equilibrium the international financial position of Italy, while this did not happened to the two Iberian countries. The negative performance of Italian GDP is explained by (lack of) investment.

It seems that Italian governments from 2013 onwards, including the current government, have had a mediocre fiscal policy. Increasing household disposable income, lowering taxes for enterprises, all this had limited effects on consumption and mainly on investment. Increase of public investment would have given much better results. Italy has the unenviable characteristic of training many young people up to a high specialization, and then sending thousand of them to other European countries and not.      

Returning to the 2020 budget law, the European Commission (and European governments by and large) would like to see a cut into the two public expenditures decided by the League-M5S government on pensions and benefits to poor people. An increase in VAT, as required by the 2018 budget law, would be welcome. Nothing against the flat tax, provided it is financed by reductions in expenditure or tax benefits.

It is not difficult to bet that such measures would have no effect on the debt-GDP ratio, or they would have it in the opposite direction, that is, determining a further increase.

What the Italian government has in mind is currently not possible to know.

Ruggero Paladini

Economist - Professor of "Scienza delle Finanze" at University "La Sapienza" Roma; Member of the Economic Board of Insight - ruggero.paladini@uniroma1.it

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