In the wake of the economic and financial turmoil ensuing from the coronavirus epidemics, influential economists have suggested different measures to foster stability and alleviate the toll that lockdowns and quarantines are exerting on production. The shock we are facing is exogenous and symmetric, but among the affected countries Italy has by far the highest debt-to-GDP ratio and the lowest growth estimates. These preexisting conditions, alongside the absence of policies aimed at spurring economic development, place our country in an alarmingly vulnerable position.
I reached out to prof. Guido Tabellini, one of Bocconi University’s most internationally acclaimed economists and academics, to help us wade through the complexity of this crisis.
In your estimation, will this crisis look like a V turn or a U turn?
We don’t know yet, but I think most analysts do not expect a V-shaped recovery, because the virus will remain with us until a vaccine is found. The shutdown and social distancing will have to partially continue even if production resumes fully and that, together with uncertainty and the global nature of the crisis will likely imply a slow recovery.
You’ve recently written with prof. Giavazzi that “member states should jointly issue a large amount of very long maturity COVID eurobonds backed by their joint tax capacity”. Would those bonds be issued independently by each member state or by the European Union, and what do you mean by joint tax capacity?
I think there are several possible institutional ways to achieve this goal. One possibility would be that each member state issued its own debt, but with partial guarantees of all the other member states. Another possibility, which is close to, if I understand correctly, what is being proposed by France, is to have a fund that would collect resources in financial markets by issuing liabilities, and member states could devote a percentage of the revenues from a pre-identified tax-basis to servicing the issued debt.
The European Union itself cannot issue debt except through a very cumbersome procedure, but there are European institutions like the ESM or the European Investment Bank that could issue their own liabilities. What is essential, whatever institutional mechanism is chosen, is that this European debt be very long maturity, because it’s going to be senior relative to the national debt, therefore if it had the same maturity it would be counterproductive for the highly indebted countries. Moreover, all member states already have market access at fairly low interest rates thanks to the ECB.
Ideally, the best institutional mechanism – but that would require deeper institutional changes – would be to give a European institution some tax capacity of its own. We don’t need large amounts: 1 or 2% of GDP from each member state, a small fraction of the value added tax, would have to be committed to that European institution, thus enabling the EU to then service its own debt.
You have argued against resorting to the European Stability Mechanism (ESM), but other economists have suggested that it would be an easier solution, at least for the very short term. Why isn’t the ESM a good option?
First of all, countries like Italy or Spain already have market access to borrow and even at 10 year maturity interest rates are not very high, thanks to the support of the ECB. So, what is needed now is very long maturity debt, and it’s not clear at all that the ESM would be in a position to provide it. The current ESM credit lines at the maturity of two years would not be helpful for a country like Italy also because they would make the national debt junior, i.e. riskier. Second, it’s not clear what conditions would be attached to these loans. Third, by statute, the ESM can only lend money if a country’s debt is sustainable. This implies that you need some kind of sustainability analysis. It’s not clear what the outcome of that analysis would be. Finally, the lending provided by ESM would not exceed 2% of GDP, because those funds would have to remain available for other purposes, and there are limits to how much can be given to a single country.
Moving on to the aftermath of the pandemic, do you think it will be necessary for parliament to vote in a technical government, like the one successfully led by Sen. Monti in 2011/12, to address Italy’s burgeoning debt?
What is essential is to overcome the suspicion against experts, that instead seems prevalent amongst the populist parties. The government must avail itself of the best advice by scientists, whether they are epidemiologists and doctors or economists, because we are going through unprecedented circumstances with many aspects to consider, so getting the best advice is of first order importance. Which political majority supports the government, is a second order issue at the moment.
The debt-to-GDP ratio is estimated to rise to around 160%, and markets will probably have to be reassured that Italy is solvent and credible. In the past few years, governments have financed measures like Reddito di Cittadinanza and Quota 100 through deficit. What kind of fiscal policy do you deem necessary for the years to come?
We know that Italy has to stimulate growth and engage in a number of reforms in several areas: public administration, fighting tax evasion and reviewing government spending. All of this will have to be done and it’s clear that the debt we are accumulating can be sustainable only if interest rates remain low and if Italy takes the road of reforms. This is something that economists have been saying all along. What I think is important in the current circumstances is making sure that the resources that are obtained with the debt are not wasted but spent to facilitate as much as possible the reopening of productive enterprises and stop the lockdown. For this to happen one needs a big effort to improve the capacity of the health system to test through swabs and make sure that resources are in place to reduce the risk of contagion. Once the virus leaves us, I think the recipe is going to be the same that economist have advocated for a long time.
Some of your research has focused on identity and political beliefs, a recent example being your paper with prof. Gennaioli in 2018. Italian public opinion about the European Union is already deteriorating, what do you think the impact of the EU’s current handling of the crisis will be on populism and Euroscepticism in Italy, and do you see political polarization expanding even more because of the pandemic?
We don’t know yet what the European response to the crisis will be. There is still hope that the EU will realize that this is a historical moment and that it needs to be united to deal with the crisis. If this happens, I think that skepticism against Europe will gradually be mitigated. If this does not happen (and unfortunately the current indications are that it may be not so likely to happen), and if Italy is perceived to be left alone to solve its own problems, then yes, I think there is a risk that anti-European sentiment will grow and will extend not only to the more nationalist parts of the population but also the more cosmopolitan and internationally integrated parts of Italy, and that would be very risky for the European project and for the Italian involvement in Europe. The cost of exit is enormous, so this doesn’t mean that we are going to see an exit from the Eurozone by Italy any time soon.
BSc in Economic and Social Sciences.
I write about politics, economics and culture.
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Matteo Cremonesi
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Matteo Cremonesi
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Matteo Cremonesi
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Matteo Cremonesi
