S. Micossi – Reform of the Stability Pact: First principles
A crowded seminar held by the Astrid Foundation has launched in Italy the discussion on the future of the European Stability and Growth Pact (SGP), and economists are churning out paper after paper on the subject.
I would start with two premises, one analytical and one methodological. The analytical one is that, while an increase in the public deficit in the short term certainly supports growth, this may not necessarily be true in the medium term, for example, if public spending increases inefficiencies in the allocation of resources. The increase in public debt (beyond certain not well-known thresholds) in turn produces adverse effects, generating expectations of higher future taxes and fears among investors about the solvency of the debtor. There is little discussion on these aspects in Italy. The public narrative is that more public spending is good for the economy (it is certainly good for political parties), therefore even looser European constraints on public debt are generally a good thing. Little attention is paid to the fact that Italy’s growing public debt has now coexisted with diminishing growth and productivity for several decades, to the point of almost complete stagnation.