Questa è la seconda parte di una conferenza tenuta in Svizzera il mese scorso. Si rivolge agli investitori istituzionali, più precisamente ai fondi pensione. La prima parte la trovate qui:



The italian heritage: a nationalized economy with a huge public debt

  • Once infrastructure and basic goods - telephony, steel, highways, air travel, longterm loans, etc. - were offered by the State through the IRI (Institute for Industrial Reconstruction, founded in 1932 and liquidated in 2002). It was the “dirigiste” legacy of Fascism, or a turning point at the time of the Great Depression. To put it short, the State offered the "basic goods," those used to produce final goods.

  • This was the world of italian "sovereignty." A very nationalized world. In this world was built in the Sixties and Seventies the "welfare state" - namely health, education and pensions systems – financed by government revenues that were lower than the services offered. Hence the large public debt. At the beginning of the Nineties Italy had a nationalized economy with a large public debt. From then until now we have seen the spasms of this world.

  • Public expenditure can be divided in that for the “minimum State" and that for the “welfare state”. The cost of the minimum State has remained roughly the same since the Second World War, while the costs of the welfare state exploded. This explosion has occurred in all European countries. In the United States it was a little less, but not much less, if you make sophisticated accounts. So it is not just an Italian phenomenon.

  • Italy has spent more than the tax inflow for too long, and now has a large public debt. Until when do it spent more? Around 1990 the state budget was in balance before interest payments. Since then, the primary balance was in surplus – light or even large. The deficit was since then the son of the payment of interests on accumulated debt. Economic growth has never been too strong, and therefore the debt on GDP or remained stable, or it just fell, or grew up. Recently, the ratio has grown a lot, because the GDP (the denominator) has fallen a lot.

  • The public debt is not "given", it is "given" when it is observed at a certain time, but to be “given" it should have been "built". Well, when and where it was born ? And why? The Italian public debt was very small at the beginning of the Sixties, about 30% of GDP, then grew, reaching the 120% of GDP at the beginning of the Nineties.

  • Italy could be divided in macro regions. For each of these it is calculated the primary deficit, and then the source that feeds the debt. The public debt has been formed largely in the South. This part of the country, that has a very weak productive base, has accumulated the large deficits, which have fueled much of the national debt. Lately, the deficit of the South remains very high, but far from the depths of the Seventies. One might think that federalism (or secession) is the solution. It is not so simple, if you calculate the costs that you would have in the South and the benefits that would result from the other parts. In short, apart from the devastation that would occur in the South for the wringing of the transfers, you should address the problem of attribution of government debt outstanding.

    Greece: a country with a very small tax base

  • Greeks (politicians and those who voted them) have expanded public spending on infrastructure and public wages and “social” spending, in pensions, education and health, drawing especially on foreign funding. The trade deficit was financed by Greek debt copiously purchases by foreigners. The Greeks - in the absence of exchange rate risk -gave off the national debt with yields very low, similar to those in Germany.

  • The debt was acquired by the international financial system apparently "shortsighted". The risk was, in fact, "around the corner". Beyond a certain threshold of debt, a fragile economy like that of Greece could no longer pay for it.

  • The Greek economy is in fact very nationalized and, if it is not, it breaks up into a myriad of “dwarf” companies as the family-run taverns, tourism, etc.. Where the private sector is strong -as in the field of commercial marine -it does not feeds the tax base, because often their head offices are registered abroad. So Greece is a country with a very small tax base.

  • A country can certainly be driven for many years by import financed from abroad, provided that invest in those productive activities that tomorrow will produce for export, thus paying off the debt on (the "inter temporal budget constraint"). This has not happened.

  • The finance was "short-sighted". Even though the Greeks. The pension system is very generous with some bizarre rules (at least to our eyes): for example, the unmarried daughter was entitled to the pension of her deceased father. In short, a generous public system -intended to buy the consent -combined with a real economy crumbled could not stand. The Greeks were able to live for a long time largely above their means (trade balance and government budget in strong passive), and now have to go back and live well below their means.

          France: how to look virtuous

  • Suppose that there were those who, fearing in 2011-2012 a return of national currencies, moved their money (denominated in euro) in Switzerland. The franc exchange grew from 1.6 francs per euro to 1.2. For Switzerland it was a disaster, especially in the field of tourism. Everything costed more, while the North and South Tyrol have lower prices, but the same landscape, and speak the same language. This is why the Swiss Central Bank (SCB) buy the euro to stop the exchange rate at 1.2.

  • The SCB started buying bonds. And buy -note: in the direction of the market, not going against the trend, thus marrying the "wisdom of the crowd" - bonds of the Euro countries called "virtuous." The bond price of "virtuous" countries went up, and the yield went down.

  • The SCB continually bought German, French, Dutch, Austrian, and Finnish bonds, but the Socialist Hollande won the elections. The BCS then stopped to buy French bonds, but immediately notice that, by concentrating only on purchases of German and minor countries bonds, it contributed to increase the spread of France. The spread could, in turn, fuel the fear that France could become a "vicious" country, which would push the purchase of Swiss franc more abundant. The BCS, therefore, start to buy the French bonds, and the Holland maneuvers to correct public finances became less robust.

  • According to Standard & Poor's, SCB has bought in 2012, the equivalent of half the deficit generated in the same period by the "virtuous" countries -80 billion euro. According to the SCB, however, this figure is too high. according to the Credit Suisse it is about thirty.

    The point of view of Berlin

  • What is commonly called the "point of view of Berlin" is divided into three propositions:

  • 1 - Assume that an expense of € 100 which do not correspond taxes for 100 euro, could push the economy to growth by more than 100 euro, say 150 euro, i.e. if the income multiplier is greater than 1 (150/100 = 1.5). The added expense of 100 is financed through the issuance of bonds, so that the public debt has increased by 100. However, this is not a problem, because the economy has grown by 150 euro and the public debt of 100, and therefore, at the margin, the debt to GDP decreased (100/150 = 0.75). However, if it does not, i.e. if the multiplier is less than 1, public spending would push towards the increase in the debt to GDP ratio. Let us assume that the multiplier of expenditure is greater than one, i.e. we assume that it is "virtuous". Are we confident that once that public spending has been successfully expanded counter-cyclically then it will fall? In other words, do we really think that the public deficit, once performed the task, falls under? Or we think that public spending by its very nature -it is "captured" by organized groups - will grow in perpetuity?

  • 2 - If you imagine that one day the debt will be far greater than that of today, you also imagine that taxes designed to repay it will be greater. So today you will reduce your consumption because you are serving higher taxes tomorrow. The point of view of Berlin stated that the public debt under control helps the growth of consumption, because in the future the tax burden will be smaller.

  • 3 - The liberalization of the market of products and labor stimulates growth and then new employment. Therefore, the point of view of Berlin asserts that these reforms should be made. It is reasonable to say that economic development is greater the lower the constraints both in the product market and in that of work. If there are no constraints, then the innovations spread more easily, because they have fewer obstacles in the diffusion of products, which, in turn, can materialize only if the workforce moves - without too much friction - from old to new sectors.

  • Of the three joints of the "point of view of Berlin", the first is controversial, because the multiplier might be greater than 1, but the public spending might be unstoppable. The second (remember the Ricardo's equivalence ...) is quite bizarre because it is hard to make all of these accounts on the present value of taxes. The third is sustainable. In short, you do not have a point of view so clear and obvious that you can not have doubts about. The point of view of Berlin may be accepted mainly on the basis of considerations relating to the reforms. Without austerity measures reforms are postponed.