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Europe, public and private debt in the pandemic era

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The Master in Administrative Science and Innovation in Public Administration of the Universities of Macerata and Urbino (MasterPA), in collaboration with the PhD programme in Markets, Enterprises and Consumers of Roma Tre University, organised the webinar Europe, public and private debt in the pandemic era which took place on April 27, 2020.
The seminar, part of a broader initiative aimed at stimulating the dialogue between eminent economists and legal experts on key matters, focused on the response of policymakers and institutions to the pandemic crisis, with particular reference to the European Union’s role and its financial support to Member States.
The webinar was introduced by professors Elisa Scotti and Matteo Gnes, respectively director and co-director of the MasterPA.
Professor Scotti stressed, first of all, the importance of an interdisciplinary approach to the search for solutions to pandemic-related issues, combining economic rationality with the value choices made by the legal systems, including health, fundamental rights and environmental protection. The latter, in particular, assumes its relevance not only as an asset to be protected but also, referring to credit policies, for its economic role as factor of production and as an index of financial sustainability for states and companies. The concepts of cooperation and multidisciplinarity were also recalled by professor Matteo Gnes, who addressed the importance of solidarity as legal principle in the European integration context, with particular reference to economic solidarity: this concept is expressed in article 122 of the Treaty on the Functioning of the European Union and represents the basis for any instrument of economic cooperation in the EU.
Pierluigi Ciocca, economist, economic historian and vice director of the Bank of Italy from 1995 to 2006, gave his contribution to the debate outlining the main features of the current economic crisis generated by the pandemic and the possible solutions at European level.
In his speech, he made a comparison between the current economic crisis and the “Great Recession”. The previous global economic crisis was generated in the Anglo-Saxon world, spread in various countries and translated, in the weakest European economies, into a sovereign debt crisis and banking sector distress. By analysing the European response to the contraction in global demand and the resulting asymmetric shock, it can be considered as belated and inadequate even though, in order to counter that recession, policies to support demand and targeted interventions to support the countries most affected by financial instability would have been sufficient.
The current scenario, in Pierluigi Ciocca’s opinion, is profoundly different. First of all, the forecasts currently available would seem to prefigure, for the current year, a more severe contraction of European GDP and a higher number of affected countries. But the difference is not only quantitative: the present crisis has a different nature and different determinants.
Today we are witnessing a collapse not only of global demand, but also of global supply, with perverse implications and interactions, and extreme difficulties in predicting any resulting effect. The decline in production was, at first, the result of health measures, then combined with other factors, including general pessimism and lack of productive inputs.
One additional and more relevant problem is linked to the current crisis context: a climate of uncertainty that affects the decisions of consumers and producers and in which, as Keynes said, the probability calculus cannot work. Moreover, if global supply were to fall more than demand, a further risk could arise: that of stagflation, a situation that combines recession and unemployment with inflation.
In tackling this crisis, the actions taken from the outset by national and European institutions were certainly going in the right direction, with expansionary fiscal and monetary policies, as well as derogations from principles and rules governing these policy areas. Anyhow, the risks outlined above must be taken into account and two corrective measures must be considered: first of all, an appropriate graduation of the injection of monetary and fiscal resources in order to avoid the emergence of inflationary effects, although very difficult to implement; in addition, attention must be paid to the composition of public expenditure, favouring public investment in infrastructure, both tangible and intangible, rather than current expenditure.
Increasing spending in public investments is crucial also for the effects on the GDP. This is primarily due to the effect of the fiscal multiplier associated to government spending in infrastructures, which empirical evidence shows to be consistently greater than 1 and, under certain conditions, reaching up to 3 – meaning that one percentage point of GDP of public spending in infrastructure is associated to an overall increase of 3 percentage points in GDP, i.e. three times higher than what was spent. Moreover, in addition to covering the initial investment, this type of investment determines a key additional benefit, through positive knock-on effects in terms of private investment stimulus, tax revenues increase, social expenditure reduction: a decrease in the debt to GDP ratio. On the contrary, in case of current expenditure, this effect is empirically less than proportional, with a multiplier below 1.
Therefore, the proposal suggested by Pierluigi Ciocca is a mix of European financial support and public investment with a medium-long term horizon that could be able to contain, without systemic imbalances, the economic damages the pandemic is determining.

During the second part of the debate, in the context of the legal section, the floor has been given to the professor of Public Economic Law Giancarlo Montedoro, Section President of the Council of State, who introduced some general considerations.
First of all – he claimed- in order to understand the present reality, we should concentrate on the meaning of words, especially by substituting the term crisis, already used, for instance, for the 2008 financial meltdown, with the term catastrophe: today we are facing a real disaster in terms of number of deaths, but also for the change in the man-nature relationship and therefore in the economic situation, with no specific solution that can be proposed.
Thus, capitalism is facing its limits in relation to the use of natural resources and pollution, which, as reported by the World Health Organization, also leads to pandemic crises.
The focus of his address, however, was on the European Union, whose birth can be contextualized in the middle of the short century, as Hobsbawm described the twentieth century, and its nature summarised as a construction that works according to a model of peace, irenic, not suitable to govern recurring crises and the evident imbalances of capitalism.
The European Union framework is based on a step-by-step policy of small steps and the elaboration of gradual agreements, both on sectors, as for the Treaties on the use of atomic energy, and on the markets, up to the judgements of the Court of Justice, which represented the first model of integration through law. It was immediately evident how this integration aimed at creating a State, with a constitution in fieri, for the first time in history without wars and exterminations, but thanks to the work of intellectuals, specifically economists and jurists.
In the most recent phase of the construction of the EU, integration through law has been replaced by integration through money, but the process was only halfway done because it was a prelude to a political union that has not been realised.
As far as the construction of Community jurisprudence is concerned, this was paradoxically based on the exception to the Meroni case of 1958, which initially limited to a minimum the number of matters that could be derogated to Community bodies, then leading to the construction of agencies, networks and administrations, capable of connecting states, especially through the creation of financial constraints, and the regulation of the economy.

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