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NEXT GENERATION EU: choosing between “priorities” and priorities

European Commission EU flags in Brussels

“Communication and sentiment analysis”. Objective: Analysis of citizen’s satisfaction degree with Italian PA. Cost: € 500 million.

“Resilient urban forests for citizens’ well-being”. Objective: Improving the quality of life thanks to the development of urban forests. Cost: € 2.5 billion.

“Digital for all”. The proposal aims to equip 7.5 million families with PCs or tablets and to provide them with a support service by 3,000 tutors. Cost: € 5 billion.

These are some of the 557 projects gathered in the document leaked on September 14, for an amount exceeding € 670 billion (three times as much as the 209 billion expected from the EU). The minister for European affairs, Lucio Amendola, reacted firmly, stating that these proposals “date back to an initial stage of the work with hypotheses and proposals already largely outdated”, and that he would file a complaint with the prosecutor “To identify who was responsible for the leak”. Roberto Gualtieri, minister of the economy, also condemned what emerged by stating that “we won’t carry out hundreds of minor projects, but a few major projects”, in line with European Commission guidelines, whose objective (not surprisingly named Next Generation EU) is promoting e the implementation of structural reforms to enhance a growth process in order to guarantee, first of all, the sustainability of the further national debt accumulated due to the pandemic and, especially in the long term, high standards of well-being for future generations as well. However, what is disheartening, despite the reassurances, is that neither of the two ministers denied the veracity of these projects.

The list gives room for several doubts. What primarily emerges is the “extravagance” of some projects that were supposed to be funded with public funds with the transparency the PA is infamous for; in addition to those mentioned above (“Digital for all” looks like the tutored version of the TV bonus), we have projects for the implementation of domestic automation system for the Farnesina, for the construction of a “green Aquarium” in the port of Genoa, for the modernization of the Salerno-Reggio Calabria (completed at the end of 2016), up to those of Spielbergarian inspiration like the proposal for a “predictive justice” (we do not anticipate the crime, but we anticipate the sentence). If compared to the previous ones, it’s undeniable that justice is essential for a growth-promoting country, but perhaps, before using artificial intelligence, preliminary analog problems should be resolved. If the extravagance is combined with the disproportionate number, further perplexities regarding the operative process carried on by the ministries emerge. Each of them has gathered all its projects, showing a complete lack of a selection according to the guidelines of the European project, and demonstrating the absence (more or less voluntary) of communication and coordination among them, essential considering the constraints of the future possible budget. Finally, the € 64 billion required to strengthen the NHS denote total ignorance of the nature for the projects to be submitted to Brussels, since the ESM (the weapon of country’s enemies according to 5SM), is the only European instrument to finance it. Perhaps, however, such ignorance might be considered instrumental to Minister Speranza’s attempt to force the use of the ESM (let’s leave room for some doubt).

Obviously, on par with a broken clock that strikes the right time twice a day, there are also some projects which try to tackle more concrete issues. In particular, there are two projects aimed at bridging the infrastructural gap between Northern and Southern Italy which together total € 7.5 billion. The first 6 billion project envisages an increase in the supply of buses in Southern Italy and a faster renewal of the bus fleet with more modern and environmentally friendly models (20,770 new buses) throughout the country. Same logic for trains. 1.5 billion is the amount envisaged for strengthening regional lines, again, with the aim of filling the gap between the two areas of the country. We will see what the possible outcomes of these investments may be, considering what past constructions of large infrastructures in Southern Italy have shown.

On September 15, the day after the release of the infamous list, the National Recovery and Resilience Plan (PNRR IN Italian) was published. The intention of the government (which worked day and night in August, as stated by the prime minister Conte) is to present the PNRR and the budget law to the Commission by October 15, in order to obtain in advance 20 billion € (10%) of European funds by this year. The problem, however, is that several crucial steps still miss in order to make the NGEU operational. Implementing decrees must be issued by the commission, and furthermore, the agreements must be approved by the national parliaments of all European states since they envisage an increase in national contribution to the European budget. Therefore, hope is in vain because Italy will only be able to present its plan approximately at the end of this year, and to obtain the advance not before next spring. Such haste is just a misguided attempt to divert attention from government’s difficulty to develop policies without European funds, after three decrees, financed by a 100 billion deficit (with Italian government bonds), intended to distribute an indefinite amount of bonuses and subsidies.

The PNRR is divided into three strategic guidelines: “Country Modernization“, “Ecological transition“, “Social, territorial inclusion, gender equality“. Within these guidelines, there are six missions, each divided into groups of projects (clusters). The six missions are: “Digitalisation, innovation and competitiveness of the production system”, “Green revolution and ecological transition”, “Infrastructure for mobility”, “Education, training, research and culture”, “Social, gender and territorial equity”, “Health”. The document represents a declaration of intent: lists country’s critical issues, where to intervene, what needs to be changed, role models (the ever-present Fraunhofer for R&D), and how to intervene. But, precisely this last crucial aspect isn’t deepened as it should be: not enough numbers to concretely represent the interventions, no declared priorities, no expenditure indication and no forecast of impact on GDP, no impact assessment of some ongoing projects, differently from what other countries such as France, Germany and even Greece have done. Nice words are not what matters.

To try to get an idea of the possible impact of future European funds on GDP, the document produced by Fabrizio Balassone (Head of the Economic Structure Service of the Bank of Italy) for a hearing in the Chamber of Deputies, can help. The document states that

The Next Generation EU macroeconomic impact will depend on several factors. More specifically, besides the actual amount of resources, they will be: The additional or substitute nature of future projects with respect to what already approved; the allocation among the different budget headings (given their multipliers heterogeneity); project implementation efficiency“.

Furthermore, given the uncertainty on the amount of funding “In order to obtain information on the possible magnitude of the effects, two simulations of these effects were carried out with the econometric model of the Bank of Italy based on scenarios characterized by different hypotheses on the share of resources intended to finance additional measures and on the composition of the interventions “. The model envisages two scenarios for which the 209 billion € “are used fully and without inefficiencies, with a uniform distribution of expenditure over the five-year period 2021-2025“. In the first one, the use of resources is assumed exclusively for additional investment projects with respect to the interventions already planned.

Increased expenses would amount to over 41 billion per year and could turn into a 3 percentage points cumulative growth in GDP level by 2025, with a 600,000 units employment rise”.

The document emphasizes that this scenario “requires a considerable effort in terms of planning and investment execution capacity“, since it is a question of “doubling the expenditure made in 2019 (40.5 billion; between 2000 and 2019 average annual investment expenditure amounted to 43.5 billion, […] systematically lower than planned, also due to the difficulty of preparing and managing projects) “. The second scenario “assumes that […] 30% of the resources are used for measures already planned and that the remaining part is used only for about two thirds to directly finance new investment projects” for an amount of “about 29 billion a year, of which only 19 for investments. The cumulative impact on GDP would reach almost 2 percentage points in 2025

Subsequently, it’s highlighted that the impact of fiscal measures could be more positive than what expected by the econometric model, given Italy’s weakness, and that estimates don’t incorporate the demand growth in other European countries reinforced by similar measures. Furthermore, it should be noted not to underestimate the positive effect that a rise in public capital and an improvement in services could have on private capital profitability and on economic system productivity in the long run.

However, the document also foreshadows “scenarios with more contained effects on GDP, for example in the case of only partial recourse to the Next Generation EU, a greater share of resources used for interventions already planned or a composition of less growth-promoting expenditure” . The scenario of reduced efficiency in investment spending provides that “only half of the expenditure leads to an increase in the stock of public capital, while the residual part remainsunproductive“, with a lower impact on economic activity. Under these assumptions, the cumulative effect on GDP level in 2025 would be reduced to about 2 percentage points for the first scenario and to 1.5 for the second“. Finally, the document stresses the need for a discontinuity with the past with respect to the efficiency in the use of resources to safeguard the balance of public finances in the long term. A targeted and thoughtful use of resources will be essential to revive Italian economy growth prospects and ensure the stability of public debt.

Both documents highlight the absolute need for an intervention to encourage innovation in our country. Technological innovation (to which productivity is inextricably linked) is an essential element for economic growth, as evidenced by all the economic literature; and this is precisely what Italy has lacked in the last 40 years. If we look at the data for EU 28 in 2017, on average more than 66% of R&D spending comes from the private sector, and in particular for Italy, € 14.8 billion out of € 23.8 billion of total spending on research and development in the country (1.4% of GDP against the EU’s 2.2%), are attributable to businesses, representing 63.8% of the total. If we look at the EU Industrial R&D Investment Scoreboard in 2017, we can see that the Italian companies in the top 1000 are only 38, and among these, only 5 in the top 100, for a total of almost six billion investments. They total about 40% of the 14.8 billion of private sector and about 25% of the total € 23.8 billion. The number of companies in Italy is equal to 4 million 398 thousand units, with 95.2% of micro-enterprises (less than ten employees), 4.6% of small-medium enterprises (between 10 and 249 employees) and 0,1% (3.601) large companies. As can be deduced, just over 1% of large companies move about 40% of the entire private sector’s R&D spending and about 25% of the entire country.

If institutions really want to boost innovation, this is where they really must intervene. In future years, huge and numerous efforts must be made to encourage the dimensional growth of enterprises; these are the only ones able to bear the investments necessary to carry out significant innovation projects. Given the active role of the state in the production of human capital, the other indispensable component of technological innovation, in terms of direct expenditure and system design (and you can’t do nothing but tremble if we look at the past), as regards the issue of dimensional growth of companies, the state must limit itself to establishing the “rules of the game”, to create an environment marked by flexibility and dynamism, which favours growth and leaves companies free to operate according to their own strategies. And a tax reform that incentives growth must be the beginning of this process. There will be no Fraunhofer without large companies able to finance major innovation projects. Even the digitalization, for which huge state investments are intended, risks not to expressi its potential without all those actors that thanks to their size and their international vocation (things go hand in hand), seek the flexibility that digitization is capable of. To provide. Even the green transition requires large-size companies, being the only ones able to bear the costs of a conversion towards greater sustainability (according to the Eco-Innovation Index, in 2018 Italy is below the EU average in R&D spending to develop technologies to improve energy efficiency… coincidence). For the moment, between confused lists with home automation projects and admirably packaged recovery plans, nothing concrete stands out on the horizon yet. One thing is certain: 5G antennas and railways will not be enough to transform the Tavoliere delle Puglie into our Silicon Valley.

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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