What remains after the general states? Sunday 21 June, after 9 days of work, Giuseppe Conte – from the splendid garden of Villa Pamphilj – said that it will take another time to understand it. The government takes it another week to reflect what has been said and start distilling a plan.
The latter in turn will constitute the embryo of the national version of the Recovery Plan, which Italy intends to present in Brussels in September to get access from 2021 to European resources for more than 100 billion for investments.
The two floors
The first lesson of the General States which from now on all – government included – should make an effort not to confuse two different plans: there is immediate crisis management and there the reconstruction the next few years. The Recovery Plan is not part of the first, but of the second mission and will certainly not be one of the tools with which to navigate through the recession in the coming months. For Italy to get to the money of the Recovery Plan, it will have to contain solid ideas on public administration and justice reform, not just detailed investment plans.
The hypothesis of reducing VAT
Crisis management, on the other hand, concerns problems such as income support for those who are not working, guarantees and bank moratoriums, financial support to local authorities. It also concerns, from what I seemed to understand from Conte’s words on Sunday (later specified on Monday, when the Prime Minister spoke of a slight and temporary lowering), a possible rapid reduction of VAT – the value added tax – which weighs on the cost of goods and services. So the General States would have dealt with both sides, emergency management and revival. But what are the prospects?
How much money does it take to get to the end of the year?
the question that harasses the political class today, with all due respect to the far-reaching speeches about the future that have taken place at Villa Pamphilj.
Extend the layoffs it should cost at least 4 or 5 billion per month. This implies that only the coverage of the layoffs required at least until the end of the year requested by various M5S representatives would have costs well in excess of the ten billion new deviation (ie extra deficit) that we hear about these days.
They will certainly serve at least later another 3 billion for the municipalities, whose revenue in some cases has literally collapsed.
Finally there are regions to support health expenditure and there is to replenish the Bank credit guarantee fund small and medium-sized enterprises. The increase in the endowment of the fund so far has been 7 billion (with the liquidity decree); the request for guaranteed loans was 37.3 billion from mid-March but it is expected to increase widely in three figures. So even here more funds will be needed. The further increase in the deficit to be launched could end up being well over 10 billionif the government decides to meet all these needs. Consequently the deficit itself would rise well above 11% of the gross product expected today by the European Commission (and the debt above 158%).
Will we use Mes?
Addressing all these priorities without applying for the loan at zero interest rates from 37 billion to the European Stability Mechanism – in fact unconditional – risks being very, very difficult. But something more will be understood in the coming weeks.
Meanwhile, government and majority officials are making a lot of talk about reducing the tax burden. Not only VAT, but also the tax wedge (the difference between labor costs and net amounts in the paycheck), through a reduction in the levy on certain income tax rates, the income tax for individuals. Possible? Not at any cost. Having brought the incentives from real estate renovations (ecobonus) to 110% of the costs incurred by families and having blown up the safeguard clauses from the next few years – already legislated increases in VAT – structurally increases the deficit by about 35 billion a year. That is, by itself, it increases by 2% of GDP, making 6% the starting point of the deficit next year. Italy is already starting from a deeply unbalanced public finance position, with a prospect of a further increase in debt when the state will have to activate the promised guarantees on credit to companies that are unable to repay the banks.
The truce on the markets
The massive interventions by the European Central Bank they ensure for now that these public finance imbalances do not produce a crisis on the markets. But are there really no limits to how much public debt can be done? The yields on Italian securities are low (1.30% on ten-year debt), therefore the apparent perception among investors of the risk of state insolvency is low. But the fact that for days Italy has had to offer the market even higher returns than Greece – therefore the highest in Europe – warns that not everything is fine. The public finance situation remains fragile and investors understand this. Not all (half) promises of tax relief and tax cuts can be kept. Not without parallel reforms, from bureaucracy to civil justice, which allow the country to grow more when it comes out of this crisis.
Banks and state
Stone guest of Villa Pamphili, a little hidden in the closets like the commander of the Don Giovanni but cumbersome, then the relationship between the banking sector and the state. The government will also have to decide on that in the coming months. In this crisis, credit institutions immediately took sides in defense of the Italian state, increasing the amount of Italian government securities in their balance sheets by almost 40 billion between January and April. In other words, they supported Italy by buying its public debt (which for them is a bargain even at returns at 1.3%, given that the banks finance themselves in the ECB at sub-zero rates). In the meantime, the state has also supported the banks, because at the end of the year they are guaranteeing credit granted by institutions to companies for well over one hundred billion. therefore the state is increasingly supporting banks and banks are increasingly relying on the state. Can it last and right that it last? A topic on the government’s agenda in the coming months is the option to reduce the guaranteed portion of each loan: maybe only 60%, not 100% anymore. Otherwise banks could be tempted to lend money without rigorous checks (both taxpayers eventually pay if the loan is not repaid).
The next steps
The themes therefore sleep many and time is scarce. Conte is focusing heavily on a European agreement on the Recovery Plan by July, also to ensure a peaceful summer on the markets. In the meantime, presumably, the government will publish the details of how much will the marathon of the States General cost in the end?. started with rigorous analysis in the intervention of Christine Lagarde, ended with Elisa who sang Luce live for the ministers. Only the future will tell, soon, from which of the two interventions the government will have taken the most inspiration.
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