Austerity and investments: between reality and false myths

An OCPI article, A Question of Credibility: Portugal's Success in Debt Reduction, concludes as follows: Portugal's strategy has so far paid off and the debt has fallen.
Not all Portuguese problems have been solved by structural reforms and the future path of growth and debt depends on the implementation of further reforms.
The results obtained so far are nevertheless important, and confirm that reducing the ratio between public debt and GDP by significant amounts is possible, and requires not only structural reforms and growth, but also the desire to improve the primary surplus, bringing it to levels of 2- 3 percent.
An example that Italian governments, present and future, should keep in mind.
Is all that glitters gold? It would seem so, considering how the growth rate of the Portuguese GDP has been greater than that of the debt since 2016.
But by carefully analyzing the data another truth could emerge.
Portugal has requested aid of 26 billion from the EFSF, 24.3 billion from the European Commission (EFSM = ESM), 26 billion (already repaid) from the IMF.
Below are the deadlines for reimbursement to the EFSF.
Therefore, Portugal still has to repay part of the financing received between 2011 and 2014.
In a more detailed picture, the debt to be repaid sees values between 15 billion and 20 billion per year until 2030.
The austerity policies can generally be summarized as follows : 1) Reduction of public spending 2) Limitation of private consumption (Sundays on foot in the 70s due to the oil crisis) 3) Divestments 4) Spending review 5) Increase in tax pressure 6) Squeeze on pensions In the famous PIIGS countries, including Italy and Portugal, Was there a policy of Austerity? Since it is not possible to analyze all the points in detail, the following analysis will focus on taxes, spending and investments (especially for Italy).
1) Has public spending on PIIGS decreased since 2011? Indeed, in Ireland the decline was evident, a clear cut in public spending.
Portugal also actually finds itself at significantly lower values, in terms of GDP, than those of 2011.
In Italy the values have remained essentially stable with a noticeable increase after Covid.
2) The tax burden has risen with tops for Italy and Greece, followed by Spain and Portugal, while Ireland is the only country that has recorded a strong decrease in the tax burden, being a "European tax haven for multinationals".
Ireland therefore halved its spending, but also reduced its tax burden.
It can therefore be said that Austerity policies have been adopted in Portugal: with what consequences on public finances? The macro analysis for European countries must mainly pass through three data points.
1) Debt/GDP (Stock to Flow) It is clearly evident that the only country that has lowered the ratio, among the PIIGS, is Ireland.
Spain and Portugal find themselves at the starting point, Italy in a situation of increase in the ratio, Greece at significantly higher values (the low spread is due to the fact that Greek government bonds are exclusively fixed in the portfolios of the institutions that have implemented the support and rescue plan for the Greek economy).
2) The net wealth of the public administration The situation here appears even more tragic.
While France and Germany, not present in the graph, record positive values (creation of public wealth), in the PIIGS there are only negative values (destruction of public wealth).
Also for this item, Ireland has seen an improvement since 2011, compared to the abysmal fall in other countries, which saw a post-pandemic rebound thanks to the recovery of public and private investments.
Behind Ireland is Portugal with slightly worse values compared to 2011.
3) PNE = Net Foreign Position If positive it means that the country system as a whole, public and private, has a credit situation abroad , vice versa if it was negative.
Italy is the only country to have a positive PNE today (thanks to private wealth) after the dangerous bottoms reached in 2007 and 2015.
Spain has the largest foreign debt of all, followed by Ireland which has seen its situation worsen significantly compared to 2011.
Greece has worsened (less than Ireland) while Portugal has returned approximately to 2011 levels.
Ultimately, Portugal will have regained credibility in the eyes of foreign investors and policy makers but , considering that it is more or less back where it started in 2011 and still has a lot of debt to repay, it almost seems like a draw for austerity, no defeat but also no victory.
Greece, on the other hand, embodies the classic Pyrrhic victory (politically and of foreign private banks).
Italy? Foreign debtors should sleep soundly, even if the rating has continuously worsened since 2011 while some indicators such as the PNE signaled improvements in progress (danger of yet another asset situation?).
It is the Italian who is at risk, considering how much the public administration burns wealth, in terms of quantity and speed.
But was there austerity in Italy? Yes, exclusively on investments.
Investments are obviously of two types: public and private.
The aggregate sees us lagging behind the European average, where the gap has fortunately been narrowing in recent years (PNRR?).
In fact, the public investment gap with the Eurozone has now practically closed after recording a bottom in 2018.
With the Monti Government (confident in the German solidarity that never arrived) domestic demand was destroyed by trying to generate GDP through exports.
As? By increasing national final consumption expenditure, bringing the trade balance positive, significantly reducing gross fixed investments.
For the first time, gross fixed investments exceeded 100,000 (base 2015, chained and corrected values) in the fourth quarter of 2024.
They were almost at 100,000 in 2007-2008 then the subprime crisis reduced investments, both in % of the contribution to GDP that in nominal value, the austerity (2011-2012) for the trade balance only worsened the situation, then the new lows arrived with covid.
The recovery of investments (PNRR) has brought the GDP back up, the hope is that the trend will be maintained, indeed the weight of gross fixed investments on the GDP will continue to rise (not Austerity = above 85,000).
It is no coincidence that when investments grow, the debt/GDP ratio drops (or remains stable as in 2015-2019), it is pure mathematics.
When does the Italian economy grow more than the public debt? When gross fixed investments grow and reach levels above 20% of GDP, the opposite effect occurs with values below 18%.
Within the range there should be no notable changes in the debt/GDP ratio.
We would need a European constraint that imposes incentives to keep gross fixed investments in the general economy above at least 19% of GDP.
Provocation.
Italy-Europe.
Before 2001, Italian real GDP often went above 2% growth, levels seen only during the pandemic as a "rebound effect".
The question is simple: the ECB has an inflation target of 2%, governments should have a mandatory growth target of greater than 2%, regardless of the deficit.
Thus there would probably have been a "moral suasion" for a "good debt" and not for purely electoral purposes.
If you don't reach 2% of GDP you won't be able to take on more debt the following year.
What do you think? Obviously using the average data of the last 5 years to eliminate the effects of queues.
In Italy the largest gross fixed investments are represented by the "total construction" item and we have not returned to the 2004-2008 levels even with the 110% Superbonus.
The second most important item is "plants and machinery and armaments" which is at the highest levels since 1995, perhaps also thanks to the war in Ukraine (see also Leonardo's prices).
The third item, perhaps the most important, is "intellectual property products" which is twice the 1995 value, but still too low compared to the trend of services and technology underway worldwide.
The fourth item, residual and not very significant, is "cultivated biological resources", although with the ESG trend they could exceed at least 1,000.
Trigger levels can be identified which cause the GDP to grow adequately, trying to obtain a rate higher than that of the debt: 1) Construction > 180,000 2) Plant/Machinery/Weapons > 120,000 3) Intellectual property products with an annual growth rate > by +10% (this year 63,000 for 2024 target 69,300).
Italy, like any growth-oriented country, progresses only if investments are encouraged, especially private ones which however require the driving force of public ones.
The austerity of the Monti Government has accelerated the disinvestment process, bringing it to dangerous thresholds for the Italian economy, i.e.
below 18% of GDP and below 75 billion in value.
However, also pay attention to the quality of fixed investments, in recent years the GDP has grown thanks to the PNRR and also to the war, tomorrow it will be necessary to push on the share relating to "Intellectual property products", considering that the world is increasingly oriented towards services and to technology, less to goods and industry.
If we think of pushing the GDP only with the "total construction" sector, as always done in the past, we will be a decadent country and out of touch with the reality of an increasingly "metaverse oriented" future with an eye to ESG principles.
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