The authors of the note are Matilde Casamonti and Giulio Gottardo
The economic crisis caused by the pandemic has resulted in unprecedented falls in GDP.[2] To provide support to the most affected activities and support the recovery, governments reacted by increasing public deficits which, between discretionary measures and automatic stabilizers, have reached the highest levels since the Second World War.[3] The fiscal policies of the various countries were not homogeneous. Focusing on the main advanced economies, in 2020 the deficit / GDP ratios ranged from relatively low values, such as 4.2 per cent in Germany, to truly unprecedented levels, such as 15.8 per cent in the United States. These differences are not entirely attributable to the different severity of the economic crisis. For example, in the face of a fall in real GDP of almost 5 points, Germany reacted with a fiscal expansion of 5.5 per cent of GDP, Japan by 9.1 per cent (Fig. 1).[4]
The large Eurozone countries have approved smaller fiscal expansions than the Anglo-Saxon ones, even with the same fall in GDP. Within the Eurozone, the countries affected by the most severe recessions (Spain, Italy) increased their deficits more than those least affected (Germany, but also the Netherlands and Finland).
According to the forecasts of the Monetary Fund, even in 2021 the advanced countries will maintain high deficits, both to support businesses and families hit by the crisis, and to support the recovery (Fig. 2).[5]
Differences in public deficits and falls in GDP necessarily translate into very marked differences in the dynamics of the debt-to-GDP ratio. Southern European countries were penalized both by the most severe recessions and by the higher level of public debt before the crisis (Fig. 3).[6]
Regarding the increase in public debt, despite the high deficits, the Anglo-Saxon countries did not register the largest increases, thanks to more contained decreases in nominal GDP.[7] Similarly, the northern European countries, Germany in the lead, benefited from a limited increase in debt, due to both smaller deficits and relatively modest falls in output. Finally, the debts of countries such as Italy and Spain, due to deep recessions and high deficits, recorded the greatest increases. This dynamic has therefore consolidated the divergence between the levels of public debt in Northern and Southern Europe.
Def, a shock to go determined to the goal
by Roberto Petrini
To grasp this phenomenon, one can look at the historical series of the difference between the Italian and German debt-GDP ratio. This figure, which has already been growing rapidly since 2011, ie since the sovereign debt crisis, with the current crisis has reached an all-time high since the Second World War, ie almost 90 points. Moreover, according to IMF estimates, it would not decrease even in the next few years, reaching around 94 points in 2026, as Germany would be on a faster path of debt reduction (Fig. 4).
Divergences of this magnitude are likely to create new tensions within the European Union. Next year the rules on public budgets should come back into force and it will not be easy to find formulas that can reconcile such different situations. Above all, if inflation were to rise, for example due to a sustained recovery after the pandemic ended, the ECB could not continue the current expansionary monetary policy. Consequently, under these conditions, new tensions could arise on both the political and financial fronts.
[2] See: https:// Osservatoriocpi.unicatt.it/cpi- Archive-studi-e- Analysis-perche-l-intensita-della-crisi-economica-e-uant-diversa-fra-paesi-simili
[4] The dimensions of the fiscal expansion do not coincide with the deficit, but are calculated as the increase in the deficit compared to the previous year in relation to the GDP of the previous year (and not the current one).
[5] The deficits currently forecast for 2021 do not always take into account any additional discretionary measures, which could be added to those already approved. For example, the IMF estimates for Italy do not include the Sostegni decree (32 billion) and the subsequent decree already announced (for which a new budget gap of 40 billion was requested).
[6] The breakdown of the growth of the debt-to-GDP ratio is as follows:
where D is the debt, Y the nominal GDP, d the deficit, g the growth rate of Y, ε the stock-flow adjustment, t the time.
[7] While the United States and Australia have benefited from much less severe recessions than southern Europe, in the United Kingdom, despite a similar drop in real GDP to Spain, nominal GDP contracted by only 4.7 per cent, compared to 7 per cent. 8 percent of Italy and 10.0 percent of Spain. This difference could be explained by the different method of calculating real GDP as regards the output of services in the United Kingdom. In any case, this translates into a smaller increase in the debt-to-GDP ratio in the UK, due to the smaller decrease in nominal GDP. See: https://iea.org.uk/the-relatively-large-fall-in-uk-gdp-partly-reflects-better-data/.
.