Are rules made to be broken? Yes says Prime Minister Draghi and President Macron

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by Shaun Richards

Yesterday we were reminded of what has been one of the longest running themes of the Euro area and to some extent the European Union.The reminder was provided by the Prime Minister of Italy and the President of France in the Financial Times. So let us see what they were discussing.

Prior to the pandemic, the EU’s existing fiscal rules were already in need of reform. They are too obscure and excessively complex.

Actually the main part was quite simple  with an annual deficit of 3% of Gross Domestic Product per annum allowed and a national debt of 60% of GDP. Also France had become famous for ignoring it anyway but of course not everyone was allowed to ignore it.

An obvious trigger for Prime Minister Draghi was thoughts like this that had begun to circulate.

FRANKFURT, Dec 21 (Reuters) – Italy is facing fresh questions about the viability of its debt as the European Central Bank dials back emergency support that has helped the euro zone’s most indebted economies survive the coronavirus pandemic.

The actual numbers are shown below.

Fighting the economic and health crisis has been expensive, with governments digging deep to help businesses and households. Italy’s public debt has increased from 134.8% of GDP in 2019 to a targeted 153.5% this year. ( Reuters )

This has been a long saga for Italy which has been over the 60% limit in terms of national debt for even longer than I have been blogging. Actually another threshold was set during the Greek crisis which was 120% of the national debt which Italy ( and Portugal) then both passed leaving a fair bit of egg on the faces of those who set the target.

Actually there is a deeper problem because according to what we kept being told in official forecasts the Italian national debt was supposed to fall except it did not. So the next recession was always going to see another surge. Putting it another way we are back to my “Girlfriend in a coma” theme where the issue is lack of economic growth as a cause which leads to the debt problem.In a nutshell even in the good times Italy so rarely manages economic growth of more than 1% per annum.

The bond vigilantes who back in the Greek crisis pushed the ten-year yield above 7% have been muzzled and chained by this.

The ECB’s purchase since March 2020 of 250 billion euros of Italian debt under its Pandemic Emergency Purchase Programme (PEPP) has kept a lid on borrowing costs, however, with Italy’s 10-year bond yield lower now than before the pandemic at 0.9%.

So there is a potential issue after the PEPP ends in March but actually that should be no big deal because if we return to the Financial Times we are assured things are in fact going well.

The recovery is well on its way. The EU economy has not yet returned to its pre-pandemic path, but it is on course to return to its pre-crisis level in the coming months.


The situation here is much less severe in terms of the fiscal position. The debt to GDP ratio looks set to be 115% so much lower than Italy. There is an issue with the annual deficit though compared to the past rules as the European Commission expects it to be 5.3% of GDP next year and 3.5% in 2023. Actually the latter number is not especially a trigger as France regularly ran that sort of deficit when it was supposedly playing by the Growth and Stability Pact rules.

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These numbers rely on pretty solid growth for 2022 and 2023 which is not as impossible for France as it appears for Italy. But the energy price crisis will pose questions for next year as workers and consumers find themselves with higher bills.

What do they suggest?

You might wonder why they are suggesting anything at all as apparently things have gone so well.

To fight the crisis, EU governments have spent nearly €1.8tn to help families and businesses. The European Central Bank has unleashed a sizeable monetary stimulus to support lending. And the European Commission has suspended its fiscal rules and, together with governments, launched the Next Generation EU programme, a €750bn plan to fund investment and reforms.

Also the public finances are just fine.

Public finances are also on the mend: the ratios between sovereign debt and gross domestic product across the EU have stabilised and are set to fall in 2022.

They are always set to fall for Italy it is the actually falling part which is the problem.

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Tucked away in this we get an acknowledgement of some of the real issues.

The climate and biodiversity crises are worsening, while geopolitical and military tensions are rising.

The problem is that their policies have made much of this worse. I only looked at the European energy crisis yesterday but the rush to unreliable renewables  and the closure of fossil fuel plants has left Europe depending on Russian gas. This has exacerbated problems in Ukraine and South East Europe as Russia has Europe over an energy barrel.

The next issue is a very familiar one to those of you who have followed the story of the Euro.

The implementation of structural reforms in euro area countries needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area productivity and growth potential.

Those of you with good memories will recall that this was a never ending part of Mario Draghi’s statement when he was President of the European Central Bank ( ECB). That particular quote was from 3 years ago but it was the same old song every time.

Whereas now in the middle of a pandemic it has apparently been sorted.

In Italy and France, we have already pursued ambitious reforms to protect our citizens and help them fulfil their potential, and we have already achieved tangible results. We must now go further.

These are? There seems to be a lack of detail here as this is, to say the least rather vague.

We must deepen the reform agenda and accompany these transformations with large-scale investment in research, infrastructure, digitisation and defence.

They want the option to deploy fiscal policy in the future.

The ability to deploy fiscal policy to protect our people and transform our economies has been, and remains, central to this strategy

Yet they also have echoes of the austerity promoted at the ECB by one Mario Draghi.

There is no doubt that we must bring down our levels of indebtedness.

Actually in Italy’s case there is not only doubt there is a track record in the opposite direction. Indeed the next sentence hints at that with a rather curious reference to sovereignty.

We need to have more room for manoeuvre and enough key spending for the future and to ensure our sovereignty.

Indeed the plan to reduce indebtedness only seems to last a few sentences.

Debt raised to finance such investments, which undeniably benefit the welfare of future generations and long-term growth, should be favoured by the fiscal rules, given that public spending of this sort actually contributes to debt sustainability over the long run.


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As we approach the end of the year there is a January feeling of two faces about all of this. The rules which they now want to change were supported by both of them for many years and I think that issue needs addressing. It is also true that things have changed as the issue of debt costs is much lower than it was but it is also true that this has been fed by something they are also trying to criticise.

The European Central Bank has unleashed a sizeable monetary stimulus to support lending……and overburdened monetary policy.

The overburdening of monetary policy has come as the ECB has effectively financed their spending, mostly via the PEPP QE programme. Whilst it will stop other types of QE will continue as to quote Elvis.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby
Why can’t you see
What you’re doing to me
When you don’t believe a word I say?

Also let me give you the example of energy. Their plans and policies have made things worse as things which have been counted in GDP are now making workers and consumers worse rather than better off. So far there has been virtually no acknowledgement of this let alone a change of course.

Meanwhile poor old Italy has had a curse put on it if you look at the track record of the Economist.

That honour goes to Italy. Not for the prowess of its footballers, who won Europe’s big trophy, nor its pop stars, who won the Eurovision song contest, but for its politics. The Economist has often criticised Italy for picking leaders, such as Silvio Berlusconi, who could usefully have followed the Eurovision-winning song’s admonition to “shut up and behave”. Because of weak governance, Italians were poorer in 2019 than they had been in 2000. Yet this year, Italy changed.

Let me end by wishing you all a Merry Christmas and a Happy New Year. I will be taking a break until the New Year but will be posting a podcast of an interview I have done for The Purse Podcast as soon as they have processed it

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