Austerity, which has been a religion since the Great Financial Crisis that began in 2008, is irreparably entrenched in international institutions (even the International Monetary Fund). This Tuesday it was Fabio PanettaAn Italian economist on the Executive Committee of the European Central Bank (ECB) who opted for a policy of reducing government spending during the recession.
“We have paid a high price for this in the form of weak growth, higher unemployment and worsening fiscal conditions,” he explained at a conference on the European Union’s (EU) new fiscal rules, which are currently being negotiated. And it will be operational from 2024, after being put on hold in 2020 due to COVID.
“Before the pandemic, we accumulated a significant public investment gap that undermined our economic potential,” said Panetta, who will leave the ECB’s executive committee on Nov. 1 and remain governor of the Bank of Italy. Continue to vote in the institution’s monetary policy decisions.
“But the response to the pandemic was different. National fiscal policy responded countercyclically to the recession [aumentar el gasto cuando la actividad se contrae pese a que suponga un incremento de la deuda]which is complemented by the European stimulus plan [el Plan de Recuperación] which focused on investments in green transition and digitization. This fiscal response worked in tandem with monetary policy and prudential measures,” he continued.
“The result has been a near-full recovery, with unemployment at historic lows and debt back on the downward path after the initial uptick seen in 2020,” he added. “We must incorporate the lessons learned from this experience into our fiscal governance,” he said.
In addition, according to him, “only recently, fiscal policy has complemented monetary policy to counter the inflationary effects of Russia’s war against Ukraine and the energy crisis.” Although in July 2022, the ECB began an aggressive cycle of official interest rate hikes, slowing activity growth and increasing the threat of a new recession, due to the suppression of companies’ investment capacity, government spending and household consumption. increase in the value of loans and mortgages).
Another recovery plan, but permanent
From this point of departure and despite the objections, the Italian made a proposal for new EU prosecutors and the creation of another common fund that guarantees “permanent central fiscal capacity. […] For green and digital transitions, common defense and energy security, migration policy and development of new technological infrastructure in innovative sectors.
He made four recommendations regarding fiscal rules. First of all, “must foresee Real, gradual and sustainable adjustment of public debt ratios Strengthen resilience and restore fiscal space ahead of future recessions. On the other hand, “fiscal policy should be Truly countercyclicalBoth to respond to adverse economic shocks and to restore reserves once the economy gets back on track.
Third, “the proposed framework should ensure that Member States can formulate their own strategies to achieve the goals of debt and deficit reduction”. and finally, Effective fiscal governance should contribute to the EU’s growth potential.
“We must not sacrifice much-needed investments that have been too low for too long with harmful long-term consequences.” It was also the result of a fiscal framework that was not designed to protect investment, in which fiscal consolidation was often attempted by reducing public investment. Even in highly efficient economies, low public investment and the resulting private investment gap undermine competitiveness over time, threatening future growth,” he emphasized.
Panetta admitted that the European Commission’s proposal, which is being negotiated, goes in this direction. The proposal, which has been on the table since April, maintains a deficit of 3% of GDP (gross domestic product) and a debt of 60%. The big difference is that the threat of fiscal adjustment does not arise from failure to meet these targets, but is related to the commitment of each country’s medium-term plans to achieve these targets. Last week, the Bank of Spain published a table summarizing it.
According to the institute itself, Spain will close 2023 with a deficit of up to 4%. Just over a third of European partners will do so with a budget imbalance of less than 3%. The same goes for the debt, which will remain at about 110% of the gross domestic product in our country at the end of the year.
On the other hand, the big news is the limit on the increase of public spending for each partner. For our country it is 2.6%. According to estimates, in 2024 it will grow by only 1.4%.
Finally, it adds “qualitative guidelines on investment and energy measures” in line with the reforms (such as labor, pensions, housing policy…) required by the recovery plan, and which since 2021 the government has implemented less than 10. Total percentage in case of investments and 60% in case of reforms.
Source: El Diario