Giancarlo Elia Valori
As we have all realized, since the COVID-19 epidemics broke out the number of regulations enacted – especially by the Italian Presidency of the Council of Ministers – has literally sky-rocketed.
The starting date of the sequence of regulations is certain. It is, in fact, January 31, 2020 with the declaration of the state of emergency connected to the onset of diseases resulting from transmissible viral agents, pursuant to Article 7, paragraph 1, sub-paragraph c) of Legislative Decree No. 1 of 2018 (Civil Protection Code).
The Prime Minister’s Decrees, the many Guidelines, Directives and Ministerial Orders, as well as the many Orders of the Head of the Civil Protection Department and, finally, the many Regional and even Municipal Orders have added to the Emergency Ordinances and the many – probably too many – decree-laws to be quickly converted into laws after the Parliament’s vote, pursuant to the Constitution.
There has never been an exception to the eternal rule – mathematical, at first, and then legal – according to which the greater the number and complexity of rules, the greater the indecision and misunderstanding inherent in their implementation.
Even in such a severe and complex situation, the messy regulatory system created with the Emergency Ordinances and Decrees for the COVID-19 infection is, therefore, a source of ambiguity, indecisiveness and potential conflict between State apparata and Local Administrations.
This is the reason why, even in the State administration, the old maxim of medieval logic, simplex sigillum veri, should apply.
Hence which is the final criterion for solving the inevitable regulatory ambiguity? The criterion is Politics, seen as Alexander’s Sword cutting the Gordian Knot immediately.
This is, in fact, the real function of democratic representation, in a highly-regulated context, as is the case in every modern Western country.
Parliament is always the decision-maker, together with the Government and the Presidency of the Republic, responsible for both budget items and the hierarchy of rules, which should be as simple as possible, as already taught us by Beccaria.
Reverting – after this example – to the issue of Italy’s current Budget Law, what is it, in fact?
As is well-known, the Budget Law is the legislative instrument, provided for by Article 81 of the Constitution, which lays down how the Government – with a preliminary accounting document – communicates to Parliament the public expenditure and revenue forecast for the following year, pursuant to the laws in force.
At first, it should be noted that much of the expenditure is bound to be fully hypothetical – as happens also in private budgets – and cannot be completely organized by means of a single old or new rule. Finally, some budget items depend on cash flows and expenses which can never be fully predictable in the budget.
Again pursuant to Article 81 of the Constitution, unlike what currently happens for the Stability Law, the law for adopting the State Budget cannot introduce new taxes and new expenses.
The structure of the State Budget, namely the network of fixed items, must be only that one.
The reason is obvious but, given this asymmetry, it is difficult to put together the Budget Law and the Stability Law in a reasonable way.
It should be recalled that the Stability Law, also known as Finance Act or Budget Package, is the ordinary law proposed by the Government, which regulates the economic policy of the State (and also of civil society) for three years.
Well, but in three years, as they say in French, chosir son temps, c’est l’épargner.
In three years everything is done and everything can be destroyed or change, especially with the kind of international economy we are dealing with now.
The Stability Law has been so called, almost officially, since 2009 mainly as a result of the introduction of “fiscal federalism”, implemented with the constitutional reform of 2001, which requires that the activity of the “central” State is coordinated with the local one, which has autonomous and different assets – albeit not always – from the “central” State finance.
I believe that the famous “federalism” has been a long-standing illusion from which the sooner we wake up the better.
The distribution of revenue among the Regions – increasingly eager for money, especially after the reckless “Reform of Title V” of the Constitution, invented by the leftist governments in the belief they could take votes away from the Northern League Party – has been detrimental. It has made the Local Authorities increasingly powerful, and therefore large and very expensive, with an efficiency that, except for the Northern regions, which would have been efficient anyway, has plummeted throughout the rest of Italy.
Again as a result of the Treaty of Maastricht – a city previously unknown except for the French siege of 1673, in which D’Artagnan stood out – the Stability Law must comply with the requirements of economic and financial convergence between the EU countries, but also with the criteria regarding the rules of coordination between the local, regional and State levels of public finance of the various EU-27 Member States. Sicily will coordinate with the economy of Finland, all based on cellulose and mobile phones, while Piedmont, with its precious white truffles, will coordinate with the Tayloristic and low-cost factories of the Czech Republic.
Beyond a certain level, the economies are incomparable with one another and there is no single currency that can put them in communication.
If anything, we would need public accounting like the one that is implemented – even at European level – with the Power Purchasing Parity criteria.
For the first time, in the 2009 Stability Law, an additional instrument was added on welfare – which currently, in the European bureaucratic jargon, also means “Health” – in which there are regularly also rules on labour, social security and competitiveness, which have little to do with Welfare and is drafted according to a deadline of missions, multi-year programs and functions, which is very hard, if not impossible, to monetize.
Furthermore, pursuant to Law No. 234/2012, the Stability Law has also provided that, as from 2016, the Stability Law shall be a Consolidated Act together with the Budget Law.
This is anomalous, considering that the latter can regulate and create new taxes and duties, while the former cannot.
However, the Reform of the State Budget, implemented with Law No. 163/2016 adopted on July 28, 2016, was definitively approved with over 80% of votes in Parliament.
The Stability/Budget Law must be submitted by the Government to Parliament every year by October 15 and Parliament must adopt or amend it otherwise by December 31 of the same year. It is too short a lapse of time. Beyond the initial deadline, Article 81, paragraph 2, of the Constitution provides for the subsequent deadline of April 30 – a term which, however, shall be authorized by law.
The Stability Law shall mandatorily include: a) the net balance to be financed; b) the balance of the recourse to market instruments, i.e. the final amount of money in the annual or three-year cycle for which to resort to loans (and this is certainly a vulnus, because the speculative markets know in advance the amount that can be financed); c) the amount of the special budget funds – and this is another vulnus, since all the other countries know how much the Services, the Special Operations, the Off The Record actions, etc. will cost; d) the maximum amount for renewing the public employment contracts – another vulnus, because this allows to calculate the industrial policy and, therefore, the possible effects of the labour cost on public and private markets, with obvious advantages for the E.U. competitors; e) the appropriations for refinancing the capital expenditure already provided for by the laws in force, and hence also the three-year stop of subsequent capital expenditure; f) the long-term expenditure forecasts.
This is another vulnus since this allows to infer the sum available to a State for any E.U. military or foreign policy program, or for any other strategically important program.
Not to mention the reserves for mergers and acquisitions of strategically important companies within the European Union, or even outside it, but permitted by the other European partners.
A “mutualization” of the public budget which creates many dangers, but corresponds to the mental level of many E.U. accountants.
This structure of the Stability Law leads to a situation in which only two choices are possible. Either the so-called austerity policy, when it comes to restoring possible balance to public funds (but this is always decided by others). We may think that a cyclical austerity policy must also be able to spend more on certain budget items, but much less on the others, while here the amount that counts is only the final one, which automatically determines the market behaviour. The only thing that markets have in mind, like conscripts, is the purchase of our public debt instruments at the best price and with the best interest rate, often carrying out trading operations, as also happens to certain States that profit from the difference – often completely rhetorical – between their debt instruments and ours.
Or there is also the possibility of expansionary spending, which resorts always and only to deficit public spending – i.e. by issuing more public debt instruments – which can be “Keynesian” if it regards investment, but simply expansionary if rents, annuities and current expenses are privileged, in addition to investment.
Sometimes even this may be necessary.
The British economist, however, maintained that public spending applies above all to new investment, while for the “old markets” – as he called them – the self-equilibrium of private enterprises is also good.
The childish idea underlying this conceptual duality is that you can be either “big spenders” (especially if “you come from the South”) or “strict” (especially if you are self-controlled and you come from the North), but this is just a vaudeville skit, not a serious economic policy idea.
Thinking – as many people within the EU institutions believe – that “family” rigour has an impact on the State budget is a “paralogism” – just to use an ancient philosophy concept.
The equivalence between households and States – a concept often reiterated by unexperienced economists – would be fine only if households could issue face value money, which could be spent immediately according to their needs. These needs, however, would be linked to the credibility of their private “money”.
People believe in these fairy tales, especially within the European Commission.
However, the European constraints of any Stability Law are the following: 1) a 3% ratio between the actual and the forecast public deficit and the national GDP – a fully specious and abstruse ratio, even in a phase of restrictive policies; 2) 60% of the ratio between public debt and GDP, another bizarre figure, which may also regard non-Keynesian policies when – for example – a “mature” sector has to be restructured or investment must be made in new and promising areas; 3) the average inflation rate, which cannot exceed by over 1.5 percentage points the one of the three best performing Member States in the sector during the previous three years. Are EU experts aware that there is also ‘imported inflation’?
This happens when the prices of goods and services purchased abroad rise – although this formula is already quite wrong.
Inflation is imported when the costs of imported products increase and obviously countries like Italy, which are processing economies, are also great importers. God knows – in these economic phases – how import-related inflation (just think of oil products) is important for the European economies.
Furthermore, the EU has no strategic, military, geoeconomic and financial ability to change the oil and gas producers’ treatment towards it. The same holds true for the other particularly important raw materials.
Let us now focus on constraint 4): compliance with the long-term Nominal Interest Rate, which must not exceed by over 2 percentage points the one of the best performing Member States in terms of price stability.
This is the Taylor Rule. As the U.S. Treasury Secretary Taylor said in 1993, it is an equation in which the interest rate is a dependent variable, while inflation and national income are regressors.
The rule is the following: ii = i*+α(πi- π*) +βγ+εi
The long-term inflationary target is π. It is the inflation rate that will prevail in the long term. Taylor here assumed that the long-term inflation rate should be 2%, as often happens in the United States, but the current interest rate is π that, only for the USA is a GDP deflator. If we were all just stockbrokers, it might also be true.
But there are costs that are included in the GDP and are neither predictable nor changeable from outside.
The actual nominal interest rate in the equation is γ. The rest is easily calculable.
Hence what does the Taylor Rule mean? When inflation starts reawakening the rates are expected to rise.
This is not at all implicit in the Maastricht rules, which also stem from these formulas.
As the Taylor Rule also shows, the increase in interest rates reflects a decrease in the supply of real monetary rates.
Not necessarily so because there may be many balances available, but with a less “attractive” monetary composition.
Again according to Taylor, investment is inversely correlated with interest rates, but this holds true for the economies that live on loans, not for many of our entrepreneurs who use – almost exclusively – “own resources” or bank loans to secure own resources.
Because of this pseudo-mathematical sequence of events, if investment decreases, the national income and also unemployment increase – which is here the only cure for inflation. But where did these guys study?
Another theory resulting from the Taylor Rule is that when the economic activity slows down, the medium-term interest rate must fall.
This has never happened, not even in the recent U.S. history. Just think of the 2006-2008 crisis.
It is also strange – and I say so from a purely analytical viewpoint – that the purpose of economic theory is only to reduce inflation, considering that – as already pointed out above – it does not depend solely on the excess of public spending, of the availability of low-cost capital (which, instead, is considered in the Taylor Rule) and the use of “moderate” budgets, according to the theories of the ignorant economists à la page.
Let us revert, however, to the procedure of the Italian Stability Law.
According to the procedure known as European Semester, the EU Member States must submit their budgets to the European Commission and the European Council by the end of April, which ipso facto limits our legislation, which also provides for a budgetary role until December 31 of the same current year.
For the time being, the penalties envisaged for some delays can be reduced, at most, to the single penalty equal to 0.2% of GDP for the year under consideration.
The principles of the State budget and the related Stability Law are again the traditional ones established by Law 468/1978, including specification, whereby all budget items must be defined analytically so as to avoid ambiguities in their intended use; truthfulness, whereby no revenue overestimations or expenditure underestimations are allowed and, finally, publicity, whereby the budget must be made known with the most suitable means.
There is also the issue arising from the adoption of Law No. 1/2012, which amended Article 81 of the Constitution, thus enshrining the principle of “balanced budget” in the Constitution.
It is a laughing matter: since the invention of the double-entry accounting by Frà Luca Pacioli – Leonardo da Vinci’s friend and sometimes drinking companion – all budgets “break even” by definition.
Otherwise they are not budgets.
In fact, the term “break even” is never used in the rule. The more cryptic term “balanced budget” is used. We all know that, in physics, the balance can also be unstable.
As already noted above, it is an unintended funny rule.
What could we do if the Vesuvius erupted – an event which may be sure in the future, but unpredictable? Would we issue debt instruments, but for ten years at least, so as not to disturb or offend the E.U. accountants and their search for a liquid monetary base for an improbable and incorrectly calculated immediate fiscal liquidity to support debt instruments?
Hence are millions of homeless people to be left in the city of Naples, possibly in the Vomero and Pietanella neighbourhoods, or in the Sanseverino Chapel, waiting for these accountants to decide to study economics and political economy on the right handbooks?
This is a rule that should not only be deleted, but should also be mocked by some famous comedian, better if with some knowledge of political economy.
In addition to the “balanced budget” requirement, as from January 1, 2014, Law 243/2012 provided for the establishment of the “Parliamentary Budget Office”, with the task of carrying out “analyses, verifications, checks and evaluations” – thus replacing the role of politicians who should be the sole ones responsible for distributing the resources available and the forecast ones among the most suitable budget items.
Moreover, in the summer of 2016, Legislative Decrees No. 90 and 93, as well as Law 164, were enacted, which amended Law 243 in relation to the Local Authorities’ balanced budgets.
Another mistake, albeit a partial one: Local Authorities live on a complex mechanism – on which we need not to elaborate here – of remittances and transfers from the Central State and of sums partially withheld by these Authorities, which are then recalculated by the Central State, again in a too complex way that need not be explained here in great detail.
In this case, how can we repay the local administrations’ colossal debt? Just think that the European Court has already condemned us for these matters. If the current legislation remains in force, there is no way out.
In short, the “European cure” on the State Budget has worsened its ambiguities. It has depoliticized the selection of budget items, thus often moving it away from voters’ and citizens’ real needs. It has not allowed a modern solution to the Local Authorities’ financial crisis. It has also devised the funny mechanism of the “balanced budget”, which literally means that there is no longer a provisional budget (hence how can the real items be calculated?). Finally, it forces us into a debt cycle that is both excessive and, at times, burdensome, but always uncontrollable.
GIANCARLO ELIA VALORI
Honorable de l’Académie des Sciences de l’Institut de France
President of International World Group