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Draghi and the endemic problem of public debt

mario draghi

We have already commented on more than one occasion on the very effective economic management by the Draghi government, "in carica" since 13 February 2021 and, in principle, with more than one more year of life guaranteed. The fact is that the high ratio of national debt to gross domestic product (GDP) weighs on the transalpine economy like a real burden. Because the reality is that Italy is the third largest economy in the eurozone, but also the country with the highest debt: it is only surpassed by Greece in the eurozone as a whole, but it should be remembered that the Greek economy barely represents 10% of Italy's national GDP, so its impact is much less.

The first to be aware of this debt is Draghi himself. When he started working at the Treasury in 1990, the national debt to GDP ratio was already 101.2%, i.e. more than forty points above the Maastricht Treaty. As a result of "Tangentopoli" and the disappearance of the party system during the 1992-94 legislature, the debt rose to 130.2%, but the good work of the Ciampi government (1993-94) brought it down to 119.4% the following year. Since then, and up to the present, the best figure was achieved in 2007, when it was 103.9%. And it was from that moment onwards, with the recession of 2008-14 in between, that public debt over GDP rose to very worrying levels, which explains, among other realities, why the economist Mario Monti was called in (November 2011) to, as head of a government of independents, begin to control a public debt that did nothing but rise and rise.

Thus, the Renzi (2014-16) and Gentiloni (2016-18) governments managed to keep the same debt at around 134%, but since then, between the wastefulness (with the "citizens' income" as a star measure) of the so-called "Government of Change" (2018-19) and the arrival of the coronavirus, the debt has climbed to a figure never seen before: 154% in 2021 (and in the first quarter of 2021 it was 159.6%). In other words, this is almost 100 points above the Maastricht target set in order to be able to join the single currency.

This does not prevent us from recognising that Mario Draghi's arrival as Prime Minister of the Council of Ministers has been a very positive boost for the transalpine economy. Because, bearing in mind that he did not govern the entire year 2021 (the centre-left coalition was still at the head of the Executive for the first month and a half), it has just been announced that the country has grown by no less than 6.6%, just 2.3 points away from recovering all that was lost in 2020 (8.9).

What is the fundamental consequence of such a high level of indebtedness? That the Italian Treasury is finding it extremely difficult to finance itself on the debt markets, and moreover this trend is growing: when Draghi became Prime Minister, the risk premium was only 97 basis points, but in the last month it has reached 171 (21 February), although it has now fallen somewhat. The consequence of this is that there is much less money available to invest in the modernisation of the country, which is much needed in many parts of the country.

In this regard, we are at a key moment to see what is going to happen. The Draghi government, like the previous coalition government, benefited from the fact that the Stability and Growth Pact was not applied, so they were able to approve expansionary budgets in public spending. But, without going as far as the dachronistic austerity of 2010-15, imposed by Germany and the countries of central and northern Europe, the reality is that Germany, whose public debt as a proportion of national GDP is 68.7%, is not going to accept that other European economies of its importance are far above it.  And it is not surprising that, when it comes to measuring the risk premium, the benchmark bond is precisely the German one.

All this explains why Draghi is trying to create a block with Macron's France, who has every chance of being re-elected president in the June 2022 elections. The French debt-to-GDP ratio has also climbed very substantially, standing at 115%, but, of course, the Italian debt still exceeds it by no less than 40 points (watch out, by the way, for the Spanish debt, which is at 120% after reaching 35% in 2007 and which shows a complete bankruptcy of the Social Security system, with a debt of more than 100 billion that nobody talks about but which is there).

The problem for Draghi is that the EU authorities, given that the worst of the coronavirus has apparently passed, have warned various countries (including Italy and Spain) that in 2023 they must return to fiscal adjustment: in other words, that the policies of expanding public spending are coming to an end and that the Stability and Growth Pact will once again be applied.

In this regard, Draghi can rest assured that the EU authorities are the first to know that there will be general elections in his country in March-April 2023 and that the risk of both left-wing populism (Five Star Movement) and right-wing populism (Salvini's League) regaining control of the situation cannot be taken again. In reality, Five Star has nothing to do in the 2023 elections, since it has turned out to be such a fiasco that it has become a sort of "subsidiary" of the Democratic Party (PD), which will have to find places for some of its leaders on the electoral lists. But Salvini's League, now without a discourse, but at all times prepared to use demagogy, ultra-nationalism and anti-Europeanism, would seize this opportunity more than ever now that the Lombard politician has sunk in the polls and must do everything in his power to become the most popular politician in the country once again.

Another question is how "flexible" the so-called "frugal countries" - Austria, the Netherlands, Denmark, Finland and Sweden - will be. Because, although Germany now has a Social Democrat chancellor, at the helm of Finance (the portfolio that is most closely linked to national and EU spending) are Christian Lindner's liberals, known for controlling budgetary orthodoxy, lowering taxes and reducing all waste in the public sector.

At the moment everything is paralysed by the war with Ukraine, which could lead to a very substantial increase in the cost of living in the European Union. But this does not prevent the negotiation of budgetary conditions for 2023 and beyond, and, at least for the moment, the only thing that is known is that Germany flatly refuses to change the 60% national debt-to-GDP ratio established in Maastricht in February 1992. From then on, we will see how the negotiation, which is expected to be very tough, proceeds.

It is not a pipe dream that the same debt could be increased from 60 to 80%, or even 100%. But even so, the transalpine economy would still be more than 50 points above this level, strongly conditioning its capacity for public spending in the following decade. Of course, the situation is worse for Spain, which, unlike Italy, does not have the rich industrial north as a guarantee of payment that the Italians do, nor does it have a man of the specific weight of the Roman banker and economist. The fact is that, barring unforeseen circumstances, President Mattarella will have to call elections for March-April 2023, but Sánchez, in turn, has less and less chance of completing his term of office in Spain, which is due to end in November 2023.

The truth is that, although no one can question the worth and good work of Mario Draghi as President of the Council of Ministers (which will surely continue next year when, most likely, he becomes the new President of the Republic after Sergio Mattarella's voluntary resignation for reasons of age), this public debt, which basically dates back to the seventies and eighties of the last century, weighs like a real burden. And only a miracle can prevent it from ceasing to be so and from conditioning, now and in the future, any economic policy.

Pablo Martín de Santa Olalla Saludes is a professor at the Centro Universitario ESERP and author of the book 'Historia de la Italia republicana (1946-2021)' (Madrid, Sílex Ediciones, 2021).