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Next Generation EU: another draft and a new uncertain core
There is no peace for the 209 billion European plan: Italy hesitates on Next Generation EU and publishes an unconvincing draft “World of tomorrow“, “European renaissance”, “sharing a common direction”. These are some of the expressions in the introduction of the new national recovery plan, PNRR’s (Piano Nazionale Ripresa e Resilienza), draft to convey Italy’s […]

There is no peace for the 209 billion European plan: Italy hesitates on Next Generation EU and publishes an unconvincing draft

World of tomorrow“, “European renaissance”, “sharing a common direction”. These are some of the expressions in the introduction of the new national recovery plan, PNRR’s (Piano Nazionale Ripresa e Resilienza), draft to convey Italy’s will to be a protagonist in the European Union’s race towards the new modernity. The Next Generation EU (as explained in a previous article) is a € 750 billion upgrade of the multiannual financial framework (MFF) for the period 2021-2027. The objective guiding countries in their reforms is to have a “greener, digital and resilient Europe”; more specifically, each member state must contribute to this mission by following the country recommendations provided in the “European Semester” of 20 May.

Italy is the country that will benefit the most from this instrument, thanks to a € 209 billion endowment, and this represents both an opportunity and a responsibility. On the one hand, huge resources are made available both to recover from the pandemic and to relaunch the country for the next decades. On the other hand, there is the responsibility that the projects to be fund with these resources must respect the abovementioned conditions.

Conten of the draft

Compared to the December draft which only indicated the resources for each mission (6) and related components (17), this one specifies the amounts for each individual project. As the Observatory of Italian Public Accounts (Osservatorio dei Conti Pubblici Italiani – OCPI) points out, there is a clear change in the resource allocation. What stands out the most is the difference between the totals of the two drafts: while the previous one provided for a total of 196 billion, this one provides for 223 (+ 27%). The main reason justifying this change is that the December document only included funds from the RFF (Recovery and Resilience Facility) for a total of 196 billion, while now also those from the React EU are included, and they will increase the allocation by 14 billion. There are two further reasons for the other 13 billion gap. The first is that some projects will also receive private funding which would make them less onerous for the state; the second is the inclusion of some alternatives to projects that could be rejected by the Commission. We recall that projects must be approved by the European Council after a scrutiny by the European Commission.

It is difficult to interpret this choice in the light of our ruling class: whether as a sign of foresight for “border-line” projects or as a wish that European institutions may approve projects that don’t follow European guidelines at all (a wish for European compassion)

As regards the allocation among the several missions and components, there have been many variations. The missions health (+10.7), inclusion and cohesion (+10.5) and education and research (+9.3) had their allocations increased; the components that were reduced the most were energy efficiency and building renovation (from 40.1 to 29.4 billion) and digitalisation, innovation and competitiveness of the production system (from 35.5 to 26.7 billion). Both business and household incentives were reduced. Significant increases for public investments, more precisely for innovation and digitalisation of health care (+10 billion), tourism and culture (+4.9 billion), education (+10 billion) and protection of the territory and water resources (+5.6 billion).

The new centrality of the issue of inequalities of age, gender and territory is a relevant change in this document. Intergenerational disparity is an extremely delicate issue in our country, especially considering the disastrous pension system reforms implemented in the last fifty years. In 2020, the pension expenditure to GDP ratio, as shown by the MEF document, Le tendenze di medio-lungo periodo del sistema pensionistico e socio-sanitari, reached 17% due to the joint action of the pandemic on production and Quota 100 (last reform). Until 2042 Italy will have a plateau with alternating decrease and increase in spending, and then there will be a consistent decline until 2070.

Source: MEF, Le tendenze di medio-lungo periodo del sistema pensionistico e socio-sanitari

The burden embodied by our pension system has “ancient” origins. In fact, before the Dini Reform of ’95 which implemented the current contribution system, there were twenty-six years of a system (law of 30 April 1969) which produced the notorious “golden pensions”. In this interval the far-sighted baby pensions were approved (Rumor government 1973) for public employees. The Fornero Reform (2011) contrasts with this tradition because the government of that period had to do something to face the recessions caused by the 2008 financial crisis and the 2011 sovereign debt crisis. Last but not least, to demonstrate its closeness to the people and especially to the younger generations, the Lega-M5S government approved Quota 100 in 2019. Results: worker-retiree turnover was less than 40% (three workers every retiree were expected) and the social security system was considerably burdened. The summary of this situation is provided by the following graph of 2014 which shows the impressive gap in wealth distribution by age group in favour of those older than forty years.

Source: Computation on Bank of Italy data, Investigation on Italian families’ budgets

This trend has worsened in recent years, as evidenced by a Censis-Tendercapital Report which shows how “the share of elderly’s wealth on total of Italian families’ wealth, has raised from 20.2% to almost 40% of in 20 years. The elderly has an average wealth 13.5% higher than Italian average, that of millennials’ is 54.6% lower. In twenty-five years, the wealth of the elderly has increased in real terms by + 77%, while that of millennials decreased to -34.6%”.

What declared in the PNRR counters the political trend of the last fifty years undoubtedly dictated by the need to obtain consent. Despite the words, supposing a measure reforming social security system is unrealistic because it would represent political suicide. The only plausible hypothesis is a policy to improve young generations’ opportunities. This means first spending increase on education, reforming the labour market and making Italy an investment-attracting country. So far there have been no organic labour market reforms, but only a sequence of micro-reforms and incentives to promote youth hiring (also present in the latest budget law) to temporarily “smooth” the market and then let everything go back as it was before.

More public investments given our public administration?

Section 1.5 of the PNRR emphasizes public investments maximization (over 70%) at the expense of incentives (reduced to 21%). The document states that this decision was made due to the greater multiplicative power of public investments compared to private ones. In support of this choice, there are the impact estimates calculated through the QUEST III model developed by the European Commission; these show a path that culminates with a GDP growth in 2026, 3% higher than the basic trend scenario.

Source: PNRR, January 12th 2021

As the OCPI table shows, the difference with respect to the previous PNRR draft is equal to + 2.1%.

Source: OCPI computation on PNRR draft data

There are several assumptions underlying the model to justify such a marked increase. First, public investments are considered as complementary to private ones “in enterprises’ production function, meaning that public capital contributes significantly and persistently to the productivity and competitiveness of the economic system”. But above all they are attributed a high degree of efficiency and effectiveness, because these would consist of both tangible and intangible large infrastructural works “with a high impact in terms of potential product growth”. Although this is true, it’s necessary to specify that these effects occur especially in the long term, precisely because of the proportions characterizing these projects that require a commensurate effort both in terms of design and approval and of realization.

Inversely, incentives that induce companies to innovate or renew their investments in capital (such as digitization, innovation, and competitiveness of the production system) show their effects much faster just because of the faster implementation.

It is no coincidence that the model assumes “a progressive but realistic improvement in project implementation by public administrations”. Here is a decisive element in the Italian ability to use the European facility; in its ability to commit resources by 2023 and spend them by 2026. In fact, it should be remembered that the allocation of funds is subject to compliance with the milestones that will be presented in the final projects for the commission; projects that will have to contain precise progressive economic targets according to which resources will be granted or not (for this reason we spoke of great responsibility previously). Therefore, in the short to medium term, the slowness and inefficiency of our bureaucracy not only risk inhibiting the estimated growth prospects but above all undermining the reception of funds from Brussels.

And it is no coincidence that digitization and modernization of the public administration is the first component of the mission of digitization, innovation, competitiveness, and culture. Beyond the usual refrains about the massive digitization of processes, data sharing, speeding up and streamlining procedures (things already consolidated in other countries which didn’t require a pandemic to be implemented) the most urgent changes are those concerning the quality of human capital and the incentives to make it efficient. The document talks about improving the recruitment capacity of human capital, enhancing human capital itself, and experimenting with new contexts and working methods that can then be replicated in administrative offices (especially on this last point there are many doubts).

The reform of the public administration that has been discussed since the dawn of time is essential if Italy wants this new amount of public investments to have some effect. A reform of processes, but above all of agents. Digitized processes and communicating databases will be useless if there is no competent staff, and above all moved by an effective system of incentives to work productively. We will see if the urgency triggered by the pandemic and the presence of European constraints will be able to break a tradition that saw and still sees the administration only as a mean to consolidate vested interests and consensus.

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Enrico Ceci

Enrico Ceci

Ciao, sono Enrico e sono capo redattore della sezione economia per Aliseo. Classe '95, laureato in economia e in studi europei. Nei miei articoli, legati principalmente a temi economici ed energetici, cerco di offrire un punto di vista diverso, sempre e solo attraverso il supporto dei dati. Seguendo lo spirito di Aliseo, il mio intento è arricchire tutti coloro che dedicheranno un momento del loro tempo alla lettura dei miei contributi.

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