This thread presents data that strongly reject claims that 🇮🇹's problem has been a lack of fiscal discipline.
Italy is the pre-Corona world champion of fiscal consolidation - with problems for investment, growth and debt sustainability /1
Many claim that Italy just didn't do enough fiscal consolidation to fix its public finances. In fact, fiscal consolidation in Italy was far more sizeable than in any other advanced country (from early 1990s up to financial crisis) - according to IMF data. /2
Due to Covid, Italy’s public debt has jumped to ~160% of GDP. It’s important to understand why Italy's public debt was high already before Corona: primarily because of the legacy of the 1980s and 1990s, when interest rates on government bonds skyrocketed. /3
If we exclude the burden of interest payments, the Italian state is the world champion in running budget surpluses from the early 1990s up to Corona (“primary surpluses”). The "frugal" countries have shown much less fiscal discipline. /4
Running primary surpluses for 30 years had negative growth effects in Italy. Slow GDP growth relative to higher interest rates pushed up Italy's public-debt-to-GDP ratio. Too much fiscal consolidation is not good for debt sustainability. /4
Public investment in Italy has fallen victim to fiscal austerity after the financial crisis. Italian net public investment has been cut more strongly than the €zone average, implying a decaying public capital stock - with negative short- and long-term growth effects. /5
Italy's experience should serve as a cautionary tale: a one-sided focus on fiscal consolidation can lead to negative macroeconomic effects and relatively higher unemployment - and thus also undermine long-term debt sustainability. /6
France and Spain will have similarly high government debt ratios after Corona as Italy had before Corona. Policy-makers must do their utmost to avoid driving these countries into a doom loop where fiscal consolidation undermines recovery and the achievement of fiscal targets. /7
Successfully dealing with high public-debt-to-GDP ratios requires a departure from the mind-set that only running high primary surpluses can ensure debt sustainability. It's economically unsustainable - and also politically unsustainable, as I'll argue in a future thread. #CAIN
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How far from full employment? Our paper in European Economic Review: based on unemployment-vacancy data, we find full employment episodes in EU countries during the 1970s. Labour markets became tighter when recovering from COVID-19, but few countries hit full employment. Thread:
Based on contributions by Michaillat/Saez, we apply a full employment concept derived from the unemployment-vacancies relationship to European countries. We use the Beveridge (full employment-consistent) rate of unemployment (BECRU) to study labour markets over 1970-2022.
We find full employment episodes in EU countries in the 1970s. The European unemployment problem emerged in 1980s and 1990s. Slack in labour markets initially increased during the pandemic. Labour markets became tighter recovering from COVID-19; few countries hit full employment.
Do higher public debt levels reduce economic growth? My meta-analysis is out in the September issue of Journal of Economic Surveys. By analysing 816 estimates, I find
- publication bias in favour of negative growth effects
- no uniform public-debt-to-GDP threshold
Summary 🧵
Reinhart/Rogoff (2010) had an impact on the policy debate; policy-makers used their results (threshold in public-debt-to-GDP of 90% beyond which growth slows) to argue for austerity. But what does the evidence tell us about growth effects of higher public debt? /2
Several papers argue that there is indeed evidence for a negative causal effect of higher public-debt-to-GDP ratios on economic growth, and for a (close to) 90% threshold in the public-debt-to-GDP-ratio beyond which growth falls significantly. /3
How did Italy become the Eurozone's Achilles heel, the monetary union's most vulnerable spot? In a new working paper, we answer this question by reassessing Italy's long decline in the context of European integration and globalisation 🧵
Italy is the Eurozone's Achilles heel; its large economy has fallen behind other Eurozone peers; given the Eurozone's institutions and rules, there are constantly questions on how to manage Italy's high public debt under constraints on monetary, fiscal, industrial and wage policy
We use a new structuralist framework to synthesise different supply-side and demand-side explanations for Italy's decline.
We need to promote public debate on fiscal policy and EU fiscal rules. Yesterday, I did a presentation in Vienna on climate investment in the context of public investment needs and EU fiscal rules reform. I stressed three main points (short thread):
1. If policymakers are serious about meeting the climate goals, they will need to significantly increase public investment for climate and energy. We are talking about *additional* public investment of at least 1% of EU GDP per year.
2. The European Commission has published EU fiscal rules reform orientations that were welcomed by EU finance ministers. Tough political negotiations ahead, but what's on the table will not sufficiently increase the scope for public climate investment.
The European Parliament requested me to write a study assessing the European Commission's orientations on reforming EU fiscal rules, with a focus on Debt Sustainability Analysis as an anchor for bilateral negotiations and surveillance.
Here is a summary of my main results 🧵
The Commission’s (COM) orientations (published in November 2022) were welcomed by the conclusions of the Council of the EU on March 14th 2023. COM proposes an enhanced role for debt sustainability analysis (DSA) in assessing fiscal risks. Focus: bringing down public debt ratios.
Reform orientations:
- COM conducts a DSA for each member state projecting the public-debt-to-GDP ratio over >10 years.
- DSA inputs used to derive reference fiscal adjustment path consistent with falling debt ratio
-Negotiations COM/governments on multi-annual expenditure plans
Let's introduce a permanent EU investment fund for climate and energy bringing additional public investment of 1% of EU GDP per year. In a new study, @alichtenberger_ and I argue this would promote the green transition and strengthen the EU economically and politically. Thread🧵
Meeting the climate goals requires additional investment. The share of public funding for climate investments needs to be significant. Additional of green public investment of at least 1% of EU economic output is need annually, which would help mobilise further private investment
The Covid-19 recovery fund (“Next Generation EU”) could serve as a model for a permanent EU investment fund. EU Commission would issue bonds and distribute money based on conditionality of supporting climate/energy goals. Member states would not be individually liable.