European View

EU’s emergency fund of little use without budget flexibility

by Dino Pesole

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The European Solidarity Fund kicks in for emergency interventions. But for Italy’s spending on investments to secure its territory from natural disasters like earthquakes and floods it is necessary to trigger the budget spending flexibility margins laid out in the Commission’s “communication” of January 2015.

The sequence of earthquakes that has battered central Italy since August can no longer be qualified as an exceptional circumstance.

Therefore the second tranche of the investment clause can rightfully be activated, a measure that benefitted Italy in 2016 to the tune of 0.25% of GDP. Basically another €4.1 billion on top of the resources necessary to fight hydro-geological instability and, in particular, to make the schools safe.

In total, if you include the €6.2 billion mentioned by Economy Minister Pier Carlo Padoan in a hearing at Italy's lower house of Parliament on November 4, you reach €10.3 billion including the 0.2% (€3.4 billion) included in the budget.

So the overture by Jean Claude Juncker (“The EU won't abandon Italy to deal with the earthquake”) should now be translated into concrete action. How do you reconcile this with the Commission's recent request that the Italian government implement a correction for 0.2% of GDP in its 2017 budget?

This was the topic of discussion yesterday between Padoan and Pierre Moscovici, the European Commissioner for Economic and Financial Affairs, in Davos. No green-light came for deficit spending.

The premise is that there seem to be no alternatives to what remains the most obvious path to reduce debt: that is, to create growth, first by activating public and private investment.

Prime Minister Paolo Gentiloni does well to point out the contradictions inherent in a flexibility of “alternating currents,” that is, unyielding on minuscule shifts in the deficit, but very lax on managing the immigrant crisis. There's got to be a middle ground for compromise (like a more limited correction) and unlocking funds for reconstruction and shoring up an area that has been rocked by earthquakes for the past five months.

Italy - according to objections coming mostly from “hawks” on the Commission - has already taken full advantage of flexibility for reforms, for investment, for spending on immigrants and for security for an amount totaling €18.8 billion over the two years 2015-2016.

And now, in the latest budget that Italy's been asked to revise, another €12 billion will be reserved in an increase of the nominal deficit to 2.3% and a deterioration in the structural deficit of 0.4 percentage points from 2016 - when the adjustment requested was 0.6.

All this is true. But a pro-growth budget policy must go through a phase (at least in the convalescent stage) of prudent use of the margins of flexibility allowed by European rules, in the presence of a nominal deficit that is, in any case, under 3%, and of a substantial primary surplus (2.1%-3.4% of GDP from 2017-2019). It's not by chance that the plan is called the “Pact for Stability and Growth.”