“In 94, Belgium had a public debt of 134,1% of GDP and in 14 years it has reduced it by 50 percentage points, with a primary surplus of an average of 5%. This situation allowed Belgium "to face the Great Recession with a lower level of debt and the Belgians were less exposed to speculative attacks". This was explained by Carlo Cottarelli, director of the Observatory on Italian public accounts, during the international debate "Prevention and management of sovereign debt crises in Europe" organized by the Istituto Affari Internacional (IAI) in collaboration with Intesa Sanpaolo.
PUBLIC DEBT, SUSTAINABILITY AND THE STATE-BASED FUND
Public debt, its sustainability and the very sustainability of budgetary policies therefore remain a central issue for the stability of the Eurosystem. And as technical as it is, the issue is highly topical at a time when Italy is under examination in Brussels on the 2019 Maneuver and the Btp-Bund spread shows alarming surges. Carlo Cottarelli gave examples of some of the advanced economies that have seen their public debt significantly reduced over the past thirty years and how they have managed to reduce it. Above all, he stressed how important it is to keep in mind "the difference between public finance sustainability and debt sustainability" as a starting point in managing financial crises.
The meeting organized by the IAI came following the latest meeting between eurozone finance ministers: “After months of intense negotiations and at the end of a very long and complex meeting, we have arrived at a master plan to strengthen the euro, a plan approved by all of us”, commented the president of the Eurogroup Mario Centeno.
The square was found on the consolidation of European stability mechanism, the permanent financial stabilization mechanism which represents the common European fund to help countries in difficulty. To receive the loan, the Member State must comply with the rules of the Stability Pact and will not have to be subjected to any infringement procedure. To date, Italy does not comply with the first condition and it may soon not be in compliance with the second either if the ongoing negotiations with Brussels do not bear fruit.
THE CONSEQUENCES FOR ITALY
Marcello Messori, economist and professor at the Luiss University of Rome, who spoke at the IAI discussion table, explained his perplexities regarding the results that emerged from the last Eurogroup: in the first place, a common vision did not emerge on the instruments of the European Mechanism of stability for fiscal stabilization and convergence, nor has progress been achieved on the creation of a budget for the euro area. Above all, it is Italy's deficient position that worries the economist: "Thinking of the new power of the European Stability Mechanism as capable of determining an ex ante debt restructuring policy would represent a dramatic change that could trigger a series of instabilities at the macroeconomic, while an ex post restructuring intervention would be inevitable and efficient”.
As Centeno explained, the agreement concerns in particular the reform of the European Stability Mechanism in the management of financial crises, which could become the parachute of the European Bank Resolution Fund even earlier than expected, as early as 2020, "provided there are sufficient risk reductions in banks' balance sheets. The agreement, in fact, provides for a well-defined clause, namely that the parachute triggers in 2024, except in the extraordinary cases of urgency mentioned above. The new approach should allow European institutions to act more quickly than in the past in the event of a crisis affecting a eurozone banking institution.
NEW RULES, PROS AND CONS
"The more rigid position foresees that, in order to avail itself of the support from the European Stability Mechanism, a country in difficulty must first restructure its debt", as explained in a note from the IAI by Franco Passacantando, scientific advisor of the IAI, and Nicola Bilotta, researcher at the IAI. “This proposal is dangerous for several reasons. First of all, it is very difficult from a technical point of view to establish whether a country has a sustainable debt or not. The decision, inevitably discretionary, would therefore take on a strongly political connotation, with the risk of further fueling the increasingly popular sovereign and anti-European positions today. To avoid this politicization, some propose to set numerical thresholds, beyond which the debt would be restructured. In this way, however, a crisis of flight from government bonds would be triggered just as the debt approaches the numerical threshold. Furthermore, a large part of the debt is now held by financial intermediaries and individuals residing in the country, above all in Italy. Its restructuring would have serious consequences on internal demand and would lead to a collapse of the country's financial system, concluded by the IAI.
A second element on which the Eurogroup has found a common position is that relating to the decision to facilitate the restructuring of sovereign debt through the introduction of the clause "single limb CAC” from 2022 by introducing it in the Treaty on the European Stability Mechanism, whereby the finance ministers have decided to link sovereign bonds with simplified clauses for collective actions in justice which, by giving the final word to the majority of bondholders, will facilitate any restructuring.
On the issue of the euro area budget, agreement is still far from being found: "On the basis of a mandate from the euro area summit, work could begin on the outline, application and timing of an instrument dedicated to convergence and competitiveness ”, President Centeno reported. The discussion was heated on the topic and saw the strong opposition from Holland and the Northern front. The fear of some governments is to create moral hazard in high-debt countries that could see in the common budget a justification for not repairing their public finances.
