Lights and shadows on our public accounts. With the certainty that it will be a very difficult summer on the Rome-Brussels axis as far as economic dossiers are concerned. Italy grows slightly more than expected but is in trouble with its deficit and debt. Nothing new, they will say, we already knew it. But now everything is black and white including the fact that a corrective measure will be required in the autumn. To Italy as well as to ten other EU countries which have exceeded 3% in the debt-to-GDP ratio. And at that point, in the middle of the budget session, with the new rules of the Stability Pact in force, the truth about the magnificent progressive fortunes of the Bel Paese so much praised by the Prime Minister and her ministers, will show themselves for what they are: little more than a bluff.
The Commissioner for Economy Paolo Gentiloni yesterday released the European Commission’s “Forecast Report”. In his own way, between ironic and sarcastic, the European commissioner immediately wanted to reassure: “Don’t worry, there’s no risk in Greece”. But even just evoking that scenario, if on the one hand it exorcises it, on the other it makes it possible.
GDP rising
Let’s start with the good news. The European Commission revises its growth expectations for Italy upwards: our economy marks +0.9 in 2024 (from 0.7% in previous estimates). We are getting closer to the budget forecasts for this year (GDP set at 1.2) even if 0.3 points of difference translate into six, seven billion missing. We are growing, however, and this is certainly the good news.
Unfortunately, expectations for 2025 are limited: GDP at 1.1 instead of 1.2. Inflation is expected to reach 1.6% in 2024, while it is seen at 1.9% in 2025. The European Commission forecasts that the ratio of the deficit to Italy’s gross domestic product after 7.4% of 2023, will drop to 4.4% in 2024, to rise again to 4.7% in 2025. And here comes the second “good” news for Minister Giorgetti. A little less for the majority. “It is expected – it is written in the Report – that the public deficit will decrease in 2024, as the substantial support for the renovation of homes (Superbonus, ed.) will be interrupted but will increase again in 2025, with unchanged policies”, in the wake of “a slowdown in current revenue and a further increase in interest expenditure”. The public debt/GDP ratio is expected to “increase in 2024-2025 due to a less favorable interest growth differential and the lagged effect of incentives for home renovation”.
The South driving the North
The good news for Italy is that also in 2024 we will be among the countries driving European growth. With stagnation behind us, Europe is raising its head again with “better than expected” growth in 2024 and inflation maintaining a downward path. The forecasts for the Eurozone set the bar at 0.8, double compared to the 0.4 which was the GDP in 2023. Italy is +0.9, much better than Germany (0.1) and better than France (0.7) and Belgium (0.8). Those who are running are Spain (2.1), Portugal (1.7) and Greece (2.2). Now a side observation is immediately necessary here: those “old ballasts” of the Pigs (Spain, Greece, Portugal, someone also tried to put Italy) which in the euro crisis risked sinking Europe, are the countries which are now keeping it not only alive but also growing. Nemesis of history which is always good to treasure. Over Germany – the former locomotive of Europe and the one most affected by the effects of the war in Ukraine due to energy relations with Russia and commercial conflicts with China – the shadows continue to gather: engulfed by the recession last year, Berlin will remain in stagnation in 2024, before starting to recover in 2025. Still looking at the overall picture, Brussels’ economic forecasts mark a slight reduction in expectations for 2025 with growth at 1.4% (it was .5% in previous estimates). Slight upward revision on GDP expectations for the entire European Union for 2024, seen rising to 1% this year (it was 0.9% in previous estimates). For 2025, EU GDP is expected to grow by 1.6% (from 1.7%).
Debt and deficit, our problems
Promoted by GDP, our problems are called debt and deficit. Even if the deficit is seen decreasing (from 7.4% of GDP in 2023 to 4.4% in 2024), according to the Report it will rise again next year to 4.7% “due to the slowdown in current revenues and the further increase in interest expenditure”. The Italian Def (approved in April) sees the trend deficit at 4.3% in 2024 and 3.7% in 2025.
Brussels then expects the debt/GDP ratio to rise from 137.3% in 2023 to 138.6% in 2024 and 141.7% in 2025. The “less favorable interest growth differential” weighs heavily, we read ( the increase in rates on new issues will lead to interest accounting for 4% of GDP) and the “delayed effect” of the Superbonus incentives.
Economy Commissioner Paolo Gentiloni explained the different estimates from Brussels and Rome with a budget program without objectives for 2025 and beyond presented by the government. “A more serious comparison can be made in the coming months,” he said. On debt, for example, the Commission’s forecasts do not include the announcement of privatizations worth around twenty billion. “The details are missing to be able to evaluate them” observed Gentiloni. The problem, if anything, is that we thought we could include twenty billion privatizations in the budget without saying what, how and when.
Gentiloni also wanted to explain a couple of issues relating to the Superbonus, giving valid support to Minister Giorgetti’s rigorism. “This is a measure that will certainly have had some positive effects, but having gone out of control it has become a dangerous element and in our opinion the government is right to remedy it”. One hundred and twenty-two billion in charges borne by the State (only for completed works) would blow up even the most solid economy. The government did well, therefore, to further close the taps of this measure which was created with good objectives in 2021 and then became a monster out of control. For our coffers. However, Gentiloni added: “I want to reassure everyone that in any case we are not faced with a Greek risk.” Who then wanted to give a positive message: “2023 was a challenging year for the EU economy. But now we believe we have turned the corner.”
“Very hot summer”
With the framework of the spring estimates, the framework in the hands of the Commission to start the machine of the new Stability Pact is now complete. This year too, as in 2023, eleven states will exceed the deficit ceiling of 3% of GDP set by the treaties (9 in 2025). Among the nine, Italy is in an excellent position, in the sense that we are second to last. The new rules will translate into the summer dialogue between the Commission and the countries – “it will be a hot summer” Gentiloni joked – on the trajectories that the European executive will give on 21 June. The states beyond the limits for debt and deficit will then present multi-year spending plans by September 20th (with “flexibility” anticipated Gentiloni). As for the “corrective” part of the new Pact, after the formal launch of the excessive deficit procedures with the spring package (19 June), we will have to wait for the autumn package in November to see the Commission implement a recovery recommendation.
The corrective maneuver
“The discussion between the Commission and the various governments is being finalized, with the hypothesis of presenting the recommendations to the various countries in the November package”, said Gentiloni. In practice, this will avoid the deficit procedure requiring recovery plans to be rewritten shortly after with the arrival of the spending plans.
In practice, the requests from the EU Commission on the budget adjustment linked to the excessive deficit procedure with the new Stability Pact will arrive in November. The reason for this time split, Gentiloni explained, is that “doing it in June would not allow taking into account the medium-term plans that member countries must develop in the months separating the spring package from the autumn one. Hence comes the proposal from our offices to open the procedures in June, announcing them but to provide recommendations to the Council on procedures for excessive deficit, also in light of the medium-term plans, with the November package. It’s complicated but it’s a path agreed with the member states.” Let us also add that we do not want to “weigh” on the formation of the new European political leaders by raising the specter of corrective maneuvers and more as of now. However, it is clear that Italy will have to take a corrective action. Also because, unfortunately, there are still many risks, many obstacles on the path to returning to more stable growth (and a long way must be done to ensure more intense and not zero-point rhythms). The weight of the Pnrr’s investments is undoubted and it is no coincidence that in the chapter on Italy, the forecast report underlines their crucial role in supporting growth. Gentiloni also observed that the countries that received the greatest support from the Recovery Fund are growing the most. For the Pnrr, work is underway and there are delays in spending as well (not only in Italy).
“We are poorer”
In addition to the EU’s Spring Recommendations, two other reports were released yesterday which are useful for understanding the state of the economy in Italy. And it’s not good news. Istat’s annual report records how the performance of the Italian economy between 2019 and 2023 was “relatively good” compared to other European economies, but underlines how the recovery before the shock of 2020 was partial and only the recent recovery has brought real GDP back to the 2007 level at the end of 2023. In 15 years, a growth gap of over 10 points has been accumulated with Spain, 14 with France and 17 with Germany. If we compare 2023 with 2000, the gap is over 20 points with France and Germany, and over 30 with Spain.
Istat also reveals that “between 2013 and 2023 the purchasing power of gross wages in Italy decreased by 4.5% while in the other major EU economies it grew at rates between 1.1% of France and Germany’s 5.7”
May 16, 2024
