Global public debt after Covid has reached unprecedented levels. This, together with geopolitical tensions around the world, increases the risks for heavily indebted countries like ours. Italy can no longer afford to mortgage its future with tax amnesties and excessive bonuses. In the coming years, we must allocate more resources to defense and environmental protection, necessarily coordinating these choices at the European level. It is positive that Germany is abandoning its balanced budget rule.
Fragile: Handle with Care. The public debt briefcase metaphorically handed to every new Finance Minister may not be like the nuclear briefcase, but it can be explosive in its own way. If it falls into the hands of an adventurous operator (by the way, it is good that the US Treasury has Scott Bessent and not Howard Lutnick at the helm), it can trigger a spiral of rising interest rates required to sell government bonds, increasing deficits, and further interest rate hikes until no buyers remain. At that point, a lender of last resort such as the International Monetary Fund (or the European Commission within the EU) must intervene, granting credit only by reducing national sovereignty and imposing stringent fiscal adjustments.
Families and Governments
Politicians—the first seems to have been Margaret Thatcher—often draw analogies between public debt and household debt. This parallel is misleading because households, unlike governments, operate within given conditions: they decide whether to borrow based on interest rates offered by banks and earning opportunities (e.g., salaries, rental markets) available to them. No matter how much a single household borrows, its behavior as a “grasshopper” has no effect on the interest rates banks offer to their clients. These rates are set with reference to some market interest rate, unaffected by a single household’s actions.
Governments, on the other hand, face no such fixed parameters or constraints. The critical variables that make debt more or less sustainable—interest rates, economic growth rates, and thus future tax revenues—are all influenced by government actions.
A government running significant budget deficits and showing no ability to reduce them will only be able to sell its government bonds by raising interest rates, further increasing the deficit. A government that cuts spending and raises taxes to reduce the deficit year by year and thus the accumulated debt may, if it miscalculates the magnitude of its interventions, cause a recession that reduces tax revenues rather than increasing them, thereby raising public expenditure instead of lowering it.
Households have limits beyond which they cannot borrow. A government, especially if it has a compliant central bank willing to purchase government bonds, can borrow ad libitum. The problem is that, over time, central bank-financed purchases using money issuance drive away other buyers and plunge the country into the abyss of hyperinflation, leaving the weakest segments of society in dire poverty. Exiting such a crisis is arduous, as evidenced by the stringent measures imposed on Argentina during Javier Milei’s first year of presidency to reduce inflation from 270% to 60%. Despite these efforts, Argentine government bonds, after the Tango bond crisis, still struggle to find buyers in international markets.
Public Debt Denialism
In short, governments face much more complex choices than households, and if they make mistakes, we all pay for them. This is why it is crucial to entrust public budget management to competent individuals deemed reliable by potential investors. Their credibility buys time: a country can reduce its deficit over a longer period and with lower social costs if the government’s commitment to deficit reduction is considered credible. Experience teaches us that the social costs of fiscal consolidation are higher when adjustments are swift and linear.
It is also vital to distrust oversimplifications. In the tradition of economic denialism that eco aims to combat without compromise, miraculous theories often surface about how public debt could be reduced painlessly. For instance, some argue that the central bank could simply buy all outstanding government bonds and then destroy them, avoiding charging the government interest. However, as Olivier Blanchard explains in this issue, the central bank’s foregone interest revenue reduces its transfers to the government. In other words, what is given with one hand is taken away with the other. Depending on how the operation is structured, it may amount to nothing more than an accounting maneuver—or, if you will, a prank by those proposing such miraculous recipes.
The World After the Pandemic
The world that emerged from the pandemic is one with higher public debt (approaching the total annual income generated worldwide) and much more instability driven by war scenarios and geopolitical tensions. The debt briefcase must be handled even more carefully than before because, with so many government bonds in circulation, even minor signs of instability can prompt investors to shift from one country to another. Risk premiums on French government bonds (OATs) skyrocketed, surpassing Greek bond yields, in response to France’s political crisis and difficulties in passing a budget law to reduce the deficit.
For these reasons, economists from the International Monetary Fund, speaking personally in this issue of eco, argue that it is essential not only to stabilize but also to reduce public debt. When global debt equals 100% of total income, and as today, global growth has slowed to be roughly equal to prevailing international market interest rates, every public deficit (net of interest expenses) increases debt equivalently. Conversely, a budget surplus of 1% (technically a primary surplus), net of interest expenses, can reduce debt by 1%.
Italy, the PNRR, and Good Debt
Italy’s public debt is approaching 150% of national income. Therefore, it must achieve significant primary surpluses to reduce its debt and is particularly vulnerable to fluctuations (often unpredictable) in interest rates. The higher the debt, the greater the effort required to reduce or even stabilize it. For these reasons, the reckless lightness with which our governments (from Conte II to Draghi to Meloni) have launched and managed the National Recovery and Resilience Plan (PNRR) must be judged harshly.
In a euphoric climate, we incurred over €120 billion in debt without knowing how to use it. We continued ill-conceived initiatives like the Superbonus, which, as we document, operates like Robin Hood in reverse, taking from the poor and giving to the rich. Moreover, in three and a half years, we have yet to establish an adequate monitoring system to track how PNRR resources are being spent, let alone a rigorous evaluation of the measures’ impacts. It makes no sense to distinguish between good and bad debt if we cannot first assess the impact of investments. Alarmingly, the PNRR has not only been sidelined from the political agenda (with the minister in charge changing jobs two years before the plan’s expiration) but also from public debate. In this issue, we attempt to reconstruct where we stand.
Disinvestment in the Future
It is often believed that our country can be saved by private wealth. Let us recall the charts Giulio Tremonti (then Minister of Economy) proudly displayed on the Titanic’s deck just before the 2011 public debt crisis, comparing public debt with private wealth. As will be seen in the following pages, Italian household wealth has significantly decreased after years of economic stagnation. Today, Italy saves less than countries historically associated with high private debt, such as the United States, while household investments remain predominantly in real estate and activities that do not significantly sustain economic growth. If private wealth does not provide the boost it could to the economy, the only interpretation of statements like Tremonti’s is a desire to tax Italians’ assets much more heavily than today.
Our governments seem no more forward-thinking than Italian households in investing in our country’s future. On the contrary, they have often disinvested rather than invested. Even in the budget law about to be approved by our Parliament, there are the tax amnesties that have marked Italian financial legislation since World War II. These amnesties disinvest in the future by providing immediate revenues for the state coffers at the expense of future income. As we reconstruct in the following pages, our VAT tax revenues have drastically decreased due to amnesties that have legitimized tax evasion.
Defense, Environment, and Europe
In the coming years, it will inevitably be necessary to allocate more public spending not only to healthcare but also to environmental protection and defense. Climate change and conflicts near Europe’s borders demand these investments. These are indispensable but unlikely to significantly increase future tax revenues. Thus, we cannot afford waste or duplication of spending among European countries. These are areas where national-scale interventions make no sense. Strong coordination at the European level is required, taking advantage of the fact that Germany finally seems to be abandoning its reckless policy of always and only balanced budgets.
Will the European Union rise to the challenge? The new European Council President and the new European Commission must operate without being able to amend the Treaties, as the first elected European Council President, Herman Van Rompuy, explains in an interview in this issue. The roles of both new presidents may be far more significant than in the past. The new European Council President, Antonio Costa, will no longer face decisions pre-packaged by the Franco-German alliance. As for the new Commission, it begins with numerous jurisdictional conflicts (e.g., competition versus green policies, economy versus productivity) and commissioners who are mostly low-profile, as evidenced by mandate letters requiring “structural reporting” to the President every six months. In this context, Ursula von der Leyen’s cabinet will make the decisions. This is not necessarily a bad thing. Remember Henry Kissinger’s remark: “I don’t know whom to call when I want to talk to Europe.” We will follow developments in our “Sovereigns in Europe” column.
P.S. The next issue of eco will focus on immigration.
P.P.S. Fake articles using my name to promote cryptocurrency investments are circulating online. Beware of scams! I will never offer investment advice. It’s not my job. My writings are available on eco, Repubblica, and my personal webpage (http://mypage.unibocconi.it/titomicheleboeri/). Always verify sources and do not trust suspicious offers!
