Connect with us

Economy

The Italian Strategic Fund -CDP Equity: Structure and Future

Giancarlo Elia Valori

Published

on

The “Italian Strategic Fund” (FSI) was established on July 28, 2011, with the then Economy Minister, Giulio Tremonti, and with the collaboration of the Treasury Director General, Vittorio Grilli, under the chairmanship of Cassa Depositi e Prestiti (CDP), led at the time by Franco Bassanini, as well as with the support of CDP’s CEO, Giovanni GornoTempini.

 From the outset, like many but not all the several Strategic Funds existing in the world, the FSI has been a holding company with the primary aim of supporting strategic Italian companies.

 Strategic companies in terms of products, important for processes, decisive for technologies, essential for Italy’s cutting-edge technologies, like the Defence companies.

In this case, what does it really mean to be a “strategic company”?

The various schools of thought diverge on this point, but we could find a good definition by recalling that strategic companies are those essential for the medium-long term planning of the major and most promising sector of Italy’s industrial system.

 The idea of the FSI was also to favour the maximum efficiency of some companies and, in particular, to stimulate the enhancement  of their ability to “compete” at international level.

Initially, the FSI share capital was ridiculously low, i.e. one billion Euros, which rose almost immediately to 4 billion Euros.

However, in the initial projects and still today, the company’s endowment could have reached 7 billion Euros. Probably still too little.

Like all the similar funds currently operating in the world today, the Italian Strategic Fund is targeted to sound companies which, however, need a new capital injection.

Certainly, unlike before the great technological revolution of the Web and of logistic telecommunications, it is currently hard to speak about “national champions” as we had at the time of Renault or Fiat or, possibly, Autostrade.

Nowadays, with the Global Value Chains (GVCs), it is even hard to identify the direct nationality of products that we all consider characteristic and typical of a given nation.

With a view to understanding GVCs, we need to think above all about the geographical distribution of companies. All small and medium-sized enterprises. The other less known side of Schumacher’s “small is beautiful”.

 In the classic model of “delayed development”, which was generally accepted until the 1970s, the shift of the global production centre from the EU and the USA to Asia was interpreted only as the creation of a structural dependence of the non-Western peripheries on the Eurasian production centre.

The Marxist derivation of this model was Arghiri Emmanuel’s brilliant theory of unequal exchange, also developed in the early 1960s.

That was the origin of the theory of the world division between “rich” and “poor” countries. Currently, however, with the evident presence of world overproduction (and of financial securities to cover it) at the origin of the present economic crisis, since 2016there has been a tendency to think, instead, that there is an even more heuristic model, called “compressed development”.

Compressed development would be a criterion that puts at the centre of its interest the heterogeneity of the individual countries participating in the Global Value Chains, thus also taking into account the extraordinary difference in power of the large multinational companies compared to the infinite “peripheral” and often non-Western SMEs.

Hence the SMEs as essential factors of the new international division of labour, but depending on a higher system of GVC managers that is a cartel in individual sectors and a political and industrial agreement between different sectors.

Hence, while it is true that the highest value-added segments tend to still remain in the old Euro-American centre – although China is currently showing us a different strategy – it is equally true that a model explaining Global Value Chains with the old criterion of “comparative advantages” and asymmetry between centre and periphery no longer stands the test of time.

Hence what is the national economic interest? It is currently hard to answer this question.

 We are partially helped by Hecksler-Ohlin’s theory stating that a “nation mainly exports goods requiring factors of production it has in abundance (labour, specialized technology, capital) and that it can most efficiently and plentifully produce”.

Therefore, the share of comparative advantages stems from the composition of its primary production formula, which is selected by the global competition of SMEs compared to those who monopolistically control global chains. It also stems from the  national governments’ ability to create temporary advantages in GVCs, resulting from the definition of specific strategies and the “joint” approach of private companies.

This is currently Italy’s productive point.

 To bring some of Italy’s big national champions into the  geopolitical rather than economic oligopoly of the global companies leading the main Global Value Chains, so as to later organize the “voluntary” mechanisms that permit the hegemony of Italian SMEs in the various sectoral markets.

Recently my friend Paolo Savona has spoken about the “return of the  State as master”, but the future will enable us to have only two real forms of control of global value chains: either with a top-down approach, by producing universal enterprises that lead the chains, or with a bottom-up approach, by organizing the groups of SMEs that prevail – with public and private support – over their competitors in the division created by GVCs.

 However, all the latest statistical analyses show us that in the Euro area countries there have been massive and now excessive share transfers of State entities, as well as liberalisations, often of goods and services which are – even in the free-trade and liberal economic tradition – “natural monopolies”, but with a significant slowdown in share transfers and divestments, which in Italy, France and Germany started as early as the early 2000s.

Furthermore, Ronald Reagan – the politician epitomizing the free-trade and liberal revival – had not at all cut public spending in general, but had cut the traditional spending for civilian Welfare, with a view to favouring his specific military Welfare.

  A deficit military spending, which had no immediate inflationary repercussions, but rather acted as a technological stimulus for innovation, also in civilian enterprises.

Without “inclusive institutions”, however, i.e. without stable public organizations enabling sufficient segments of the population to have access to some wealth, all modern States tend to be relegated to be failed States, thus becoming easy prey for their structural and global geoeconomic opponents – and even at the lowest possible cost.

 This is what – inter alia – Sovereign Funds are for.

 In fact, they ensure the public or semi-public ownership of the enterprises that a State and a society choose – moment by moment – to guide their economic and social future in the medium-long term.

Hence the Sovereign Funds must be protected from the raids of possible and real competitors. Raids are continuous, while growth projects are temporary.

It should be recalled that in Gilpin’s opinion, the “aim of economic activities is to provide benefits to consumers, not to strengthen the State security”.

 But the State security is also a primary asset, which allows to quickly eliminate adverse geoeconomic actions and hence avoid  the immediate colonization of the development potential of a State and of a society.

Edward Luttwakhas also rigthly said that any economic globalization is always strategically dangerous, since it inevitably leads to what he calls “paroxysmal competition”, which is an inevitable feature of turbo-capitalism: a very rapid increase in the size and speed of trade, always combined with post-Cold War globalization, which does not accept any geographical limit to its expansion.

 If turbo-capitalism stops, it immediately melts away under the sun of value realization.

The excessive trade speed mimics its actual productivity and the size of trade sometimes masks its very low value which, however, is maintained thanks to excessive speed, which does not allow the rational and technical assessment of risks.

Hence, against the Hobbesian state of bellum omnium contra omnes typical of turbo-capitalism, which usually does not sufficiently invest in product or process innovation, we need to  think of two solutions, called the State of Economic Intelligence or the Geoeconomic State.

 Paolo Savona and Carlo Jean have spoken of the ever-increasing role of economic intelligence, which should become the axis of every modern State’s economic, financial and productive choices.

 Without Sovereign Funds, however, there is no economic intelligence.

Hence we need to firmly keep a sector, at least one, which is comparatively very advanced,  but above all export-led, and which is also protected with all the non-tariff mechanisms that are now commonly used in everyday economic warfare.

This is the reason why, for at least five years all the major Western countries have been rethinking their old deindustrialization and delocalization policies, which often deprive societies and States of the necessary systems for controlling global, financial and productive flows. Not to mention the fiscal deprivation and over-costs for maintaining structural unemployment.

In the evolution of the most recent international trade theory, we have even gone so far as to develop a Strategic Trade Theory, a model underlining the companies’ and State’s ability to improve the trade balance by working strategically -i.e. in the medium-long term – in imperfect global markets.

The oligopolistic markets are always those where leading products or services are developed, usually with public investment in Research and Development.

 This is the true nature of the Keynesian model: the State funds  what is not yet profitable, but the private sector deals mainly with “mature” or growing companies, which have already found their market.

 Hence we also need the theory of the Innovating State, i.e. the Entrepreneurial State, recently developed by Mariana Mazzuccato.

 The State imagined by Mazzuccato explores the whole scenario of business risk, thus creating above all new markets. In particular, the State creates the markets in which we need to have strong investment in situations of maximum uncertainty, thus acting as a risk taker and hence later as a market shaper.

 The “Administrative State” is a public administration “serving” private individuals, but the Entrepreneurial-Innovating State is the one that does not make the unemployed people dig the classic Keynesian holes, in the inevitable periods of production contraction, which is above all – Marxistically – tendential over-production.

 But, if anything, the Entrepreneurial-Innovating State invests in new high-quality technologies, which create original markets where, in fact, the Entrepreneurial State controls the future oligopoly. Another role of Sovereign Funds.

Technically, however, the Funds are investment funds which manage financial asset portfolios denominated in foreign currencies, according to the global rules of what we currently call the grey economy.

In theory, the Funds are divided between those which invest resources coming from raw materials or oil and gas (SWF Commodity) and all the others which, instead, invest surpluses coming from the currency surpluses of the trade balances.

 This is clearly our case.

 According to the “Santiago Principles”, a code for Sovereign Funds developed based on the International Monetary Fund’s indications, the Sovereign Wealth Funds (SWFs) are “special purpose” investment funds owned by national governments.

 Therefore, SWFs have five primary characteristics: a) they are always held by a Sovereign State; b) they make investment in foreign currency; c) they carry out their activities over a long term, with low indebtedness and without withdrawals or distribution of profit to participants; d) their accounting is strictly separate from that of Central Banks and Finance Ministries; e) they carry out research for investment with returns above the risk-free rate.

 The first real Sovereign Funds were the Kuwait Investment Authority, created in 1953, to obviously invest the capital originating from the extraction and sale of local oil, as well as the old Revenue Equalization Reverse Fund, set up by the British administration of the then colony of the Gilbert Islands, the current Republic of Kiribati, to invest the surplus from the sale of phosphates.

 The secret agreement between Kissinger and King Fahd of Saudi Arabia, after the Yom Kippur war, later channelled the extraordinary surpluses stemming from the very significant increase in the OPEC oil barrel price into US government bonds. Hence petrodollars were created.

 In the phase following the booming prices of some fundamental raw materials when, in fact, oil prices plunged, namely in the 1980s, the Sovereign Funds became the primary instrument for diversifying investment and hence for the financial stability of the countries producing raw materials (or commercial surpluses) which had already adopted them.

From then until 2005, the Sovereign Funds became the main instrument, for Asian countries in particular, to accumulate and use the foreign currency reserves arriving in the Asian countries which were more export-led and more linked to the US dollar cycle.

 To avoid having to resort to the often dangerous therapies of the International Monetary Fund, especially when the global reference currency fell, the top Asian export-led countries combined their industrial expansion policies with specific exchange rate policies, which tended to accumulate very large foreign currency funds.

 Obviously that happened only to avoid the manipulation of  currency markets in a condition of objective weakness created by an exclusively export-oriented economy – with exports to countries having a very strong currency.

In 1978 the SWF Temasek, the “historic” Singapore investment fund, came up with the idea of using Sovereign Funds for that purpose.

Temasek invested its considerable surpluses in the acquisition of companies and financial holdings in the Asian area directly bordering on Singapore, thus making the city-State – which was also the first model for Deng Xiaping’s Four Modernizations –  overcome its structural limits, thus protecting it from enemy and adverse operations on its exchange rates and on its productive system.

 Finally, from the beginning of the great subprime crisis, the Funds have spread mainly in the so-called BRICs (Brazil, Russia, India, China and South Africa) and also in some “First World” countries, especially to acquire minority shareholdings or to carry out hostile takeover operations towards competitors or potential penetrators of their national markets, possibly even with dumping actions –  and it would not be the first time.

 In 2020 SWFs are supposed to reach, worldwide, an amount of managed assets of approximately 15 trillion US dollars.

 75% of the capital managed by the Funds is currently concentrated on the top 10 operators. Obviously the SWF market is highly oligopolistic and the top 10 operators are now all Middle East or Asian entities.

The history of modern European Sovereign Funds began with  Sarkozy’s Presidency in France.

As early as 2008, the French centre-right leader set up the Fond Strategiqued’ Investissement (Strategic Investment Fund), based on two already existing financial structures, namely the Caisse des Dépôts et Consignations(the State Bank handling official deposits, which is the equivalent of the prominent Italian investment bank known as Cassa Depositi e Prestiti) and the Fond de Réserve pour les Retraites(Pension Reserve Fund), with capitalisations – at the time – of 80 and 33.8 billion Euros respectively.

However, 51% of the new French Sovereign Fund was owned by the Caisse des Dépôts and the remaining 49% by the Agence des Participations d’État (Government Shareholding Agency).

 The aim of the Fund created by Sarkozy was to invest mainly in French and foreign small and medium-sized enterprises, characterized by strong growth but having no longer access to standard market financing (although we do not know why).

The French Fund also set in when the company was overtly  threatened by a hostile takeover, or any acquisition, by foreign companies.

 The French Fund could also intervene directly in the capital of innovative industries.

 As early as 2008, however, the Italian intelligence Services have focused on the very strong need to protect the national know-how, considering that the operational plans of other Sovereign Funds interested in Italy could be useful for acquiring specific technologies.

 It has already happened: in the machine tools, agri-food,  specialized pharmaceutics and fine mechanics sectors, Italy’s top large SMEs have already been acquired by French, German and Chinese companies.

In their report to Parliament in 2010, the Italian intelligence Services already spoke of a “liquidity threat” to Italy’s companies.

The foreign private equity funds, in fact, are mainly targeted to banking, biotechnology, energy, entertainment and even online gaming companies.

Currently, however, the Cassa Depositi e Prestiti has two instruments to support companies, especially the technologically advanced ones: the Italian Strategic Fund – now CDP Private Equity – and the Italian Investment Fund.

The latter was launched in 2010, with the collaboration of some private banks, and – as usual – it is targeted primarily to small and medium-sized enterprises.

It has two operating structures: the Venture Capital Fund for innovative start-ups and the Minibond Fund, which supports the bond issues of small and medium-sized enterprises.

 The Italian Strategic Fund – 90% of which is held by Cassa Depositi e Prestiti(CDP) and the remaining 10% by FINTECNA, which is in any case fully owned by CDP – was launched in 2011 with a capital of 4.4 billion Euros and, as already mentioned, rose to 7 billion Euros.

However, why setting limits?

The Italian Strategic Fund was born with a negative experience to be made good, considering that those were the years of the takeovers for Parmalat, which had just been redressed financially, and for Bulgari, not to mention the future and possible “friendly” sales – well hyped by the Italian media- of Alitalia and Edison.

 The Italian Strategic Fund dealt mainly with medium-large companies having “significant national interest”, while, from the beginning, it created strong ties with Qatar Holding, the Russian Direct Investment Fund, the Kuwait Investment Authority and the Korea Investment Corporation.

 Moreover, in 2012 the Italian Strategic Fund signed an agreement with Qatar Holding LLC for the creation of a joint venture, called IQ Made in Italy Venture, to invest in the typical Made in Italy companies.

 The idea, which has not yet fully materialized, was to create a “luxury district”.

 The Maastricht restrictions on the so-called “State aid” always make it difficult for the Italian Strategic Fund to operate. It would possibly need an arm abroad, capable of operating on our companies without EU constraints. It would also be necessary to deem it legitimate for the Italian Strategic Fund to invest in companies of significant national interest, but regardless of the average return on the capital invested in the medium term.

 Therefore, unlike the old twentieth century economic statism, the Italian Strategic Fund invests in healthy companies and it plays -quietly and without nervousness – the role of minority shareholder. It also follows the private criteria of investment profitability and efficiency and does not follow the natural distortions, often originated by public entities, but also by powerful private entities, to manipulate production formulas and intermediate markets.

 Hence rethinking and expanding the Fund’s operations, or possibly creating specific areas of intervention for the Fund,  would be an excellent evolution of the fundamental policy lines on which the Italian Strategic Fund was conceived.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France. “

Continue Reading
Comments

Economy

COVID-19 has exposed the fragility of our economies

Guy Ryder

Published

on

The human dimensions of the COVID-19 pandemic  reach far beyond the critical health response. All aspects of our future will be affected – economic, social and developmental. Our response must be urgent, coordinated and on a global scale, and should immediately deliver help to those most in need.

From workplaces, to enterprises, to national and global economies, getting this right is predicated on social dialogue between governments and those on the front line – the employers and workers. So that the 2020s don’t become a re-run of the 1930s.

ILO estimates are that as many as 25 million people could become unemployed, with a loss of workers’ income of as much as USD 3.4 trillion. However, it is already becoming clear that these numbers may underestimate the magnitude of the impact.

This pandemic has mercilessly exposed the deep faultlines in our labour markets. Enterprises of all sizes have already stopped operations, cut working hours and laid off staff. Many are teetering on the brink of collapse as shops and restaurants close, flights and hotel bookings are cancelled, and businesses shift to remote working. Often the first to lose their jobs are those whose employment was already precarious – sales clerks, waiters, kitchen staff, baggage handlers and cleaners.

In a world where only one in five people are eligible for unemployment benefits, layoffs spell catastrophe for millions of families. Because paid sick leave is not available to many carers and delivery workers – those we all now rely on – they are often under pressure to continue working even if they are ill. In the developing world, piece-rate workers, day labourers and informal traders may be similarly pressured by the need to put food on the table. We will all suffer because of this. It will not only increase the spread of the virus but in the longer-term dramatically amplify cycles of poverty and inequality.

We have a chance to save millions of jobs and enterprises, if governments act decisively to ensure business continuity, prevent layoffs and protect vulnerable workers. We should have no doubt that the decisions they take today will determine the health of our societies and economies for years to come.

Unprecedented, expansionary fiscal and monetary policies are essential to prevent the current headlong downturn from becoming a prolonged recession. We must make sure that people have enough money in their pockets to make it to the end of the week – and the next. This means ensuring that enterprises – the source of income for millions of workers – can remain afloat during the sharp downturn and so are positioned to restart as soon as conditions allow. In particular, tailored measures will be needed for the most vulnerable workers, including the self-employed, part-time workers and those in temporary employment, who may not qualify for unemployment or health insurance and who are harder to reach.

As governments try to flatten the upward curve of infection, we need special measures to protect the millions of health and care workers (most of them women) who risk their own health for us every day. Truckers and seafarers, who deliver medical equipment and other essentials, must be adequately protected. Teleworking offers new opportunities for workers to keep working, and employers to continue their businesses through the crisis. However, workers must be able to negotiate these arrangements so that they retain balance with other responsibilities, such as caring for children, the sick or the elderly, and of course themselves.

Many countries have already introduced unprecedented stimulus packages to protect their societies and economies and keep cash flowing to workers and businesses. To maximize the effectiveness of those measures it is essential for governments to work with employers’ organizations and trade unions to come up with practical solutions, which keep people safe and to protect jobs.

These measures include income support, wage subsidies and temporary layoff grants for those in more formal jobs, tax credits for the self-employed, and financial support for businesses.

But as well as strong domestic measures, decisive multilateral action must be a key stone of a global response to a global enemy. The G20’s virtual Extraordinary Summit on the COVID-19 response  on 26 March was a welcome first step to get this coordinated response going.

In these most difficult of times, I recall a principle set out in the ILO’s Constitution: Poverty anywhere remains a threat to prosperity everywhere. It reminds us that, in years to come, the effectiveness of our response to this existential threat may be judged not just by the scale and speed of the cash injections, or whether the recovery curve is flat or steep, but by what we did for the most vulnerable among us. ILO

Continue Reading

Economy

The reforms and the current situation of the State budget and accounts

Giancarlo Elia Valori

Published

on

As we have all realized, since the COVID-19 epidemics broke out the number of regulations enacted – especially by the Italian Presidency of the Council of Ministers – has literally sky-rocketed.

 The starting date of the sequence of regulations is certain. It is, in fact, January 31, 2020 with the declaration of the state of emergency connected to the onset of diseases resulting from transmissible viral agents, pursuant to Article 7, paragraph 1, sub-paragraph c) of Legislative Decree No. 1 of 2018 (Civil Protection Code).

 The Prime Minister’s Decrees, the many Guidelines, Directives and Ministerial Orders, as well as the many Orders of the Head of the Civil Protection Department and, finally, the many Regional and even Municipal Orders have added to the Emergency Ordinances and the many – probably too many – decree-laws to be quickly converted into laws after the Parliament’s vote, pursuant to the Constitution.

 There has never been an exception to the eternal rule – mathematical, at first, and then legal – according to which the greater the number and complexity of rules, the greater the indecision and misunderstanding inherent in their implementation.

 Even in such a severe and complex situation, the messy regulatory system created with the Emergency Ordinances and Decrees for the COVID-19 infection is, therefore, a source of ambiguity, indecisiveness and potential conflict between State apparata and Local Administrations.

 This is the reason why, even in the State administration, the old maxim of medieval logic, simplex sigillum veri, should apply.

 Hence which is the final criterion for solving the inevitable regulatory ambiguity? The criterion is Politics, seen as Alexander’s Sword cutting the Gordian Knot immediately.

  This is, in fact, the real function of democratic representation, in a highly-regulated context, as is the case in every modern Western country.

 Parliament is always the decision-maker, together with the Government and the Presidency of the Republic, responsible for both budget items and the hierarchy of rules, which should be as simple as possible, as already taught us by Beccaria.

 Reverting – after this example – to the issue of Italy’s current Budget Law, what is it, in fact?

 As is well-known, the Budget Law is the legislative instrument, provided for by Article 81 of the Constitution, which lays down how the Government – with a preliminary accounting document – communicates to Parliament the public expenditure and revenue forecast for the following year, pursuant to the laws in force.

 At first, it should be noted that much of the expenditure is bound to be fully hypothetical – as happens also in private budgets – and cannot be completely organized by means of a single old or new rule. Finally, some budget items depend on cash flows and expenses which can never be fully predictable in the budget.

 Again pursuant to Article 81 of the Constitution, unlike what currently happens for the Stability Law, the law for adopting the State Budget cannot introduce new taxes and new expenses.

 The structure of the State Budget, namely the network of fixed items, must be only that one.

 The reason is obvious but, given this asymmetry, it is difficult to put together the Budget Law and the Stability Law in a reasonable way.

 It should be recalled that the Stability Law, also known as Finance Act or Budget Package, is the ordinary law proposed by the Government, which regulates the economic policy of the State (and also of civil society) for three years.

 Well, but in three years, as they say in French, chosir son temps, c’est l’épargner.

 In three years everything is done and everything can be destroyed or change, especially with the kind of international economy we are dealing with now.

 The Stability Law has been so called, almost officially, since 2009 mainly as a result of the introduction of “fiscal federalism”, implemented with the constitutional reform of 2001, which requires that the activity of the “central” State is coordinated with the local one, which has autonomous and different assets – albeit not always – from the “central” State finance.

 I believe that the famous “federalism” has been a long-standing illusion from which the sooner we wake up the better.

 The distribution of revenue among the Regions – increasingly eager for money, especially after the reckless “Reform of Title V” of the Constitution, invented by the leftist governments in the belief they could take votes away from the Northern League Party – has been detrimental. It has made the Local Authorities increasingly powerful, and therefore large and very expensive, with an efficiency that, except for the Northern regions, which would have been efficient anyway, has plummeted throughout the rest of Italy.

Again as a result of the Treaty of Maastricht – a city previously unknown except for the French siege of 1673, in which D’Artagnan stood out – the Stability Law must comply with the requirements of economic and financial convergence between the EU countries, but also with the criteria regarding the rules of coordination between the local, regional and State levels of public finance of the various EU-27 Member States. Sicily will coordinate with the economy of Finland, all based on cellulose and mobile phones, while Piedmont, with its precious white truffles, will coordinate with the Tayloristic and low-cost factories of the Czech Republic.

 Beyond a certain level, the economies are incomparable with one another and there is no single currency that can put them in communication.

 If anything, we would need public accounting like the one that is implemented – even at European level – with the Power Purchasing Parity criteria.

 For the first time, in the 2009 Stability Law, an additional instrument was added on welfare – which currently, in the European bureaucratic jargon, also means “Health” – in which there are regularly also rules on labour, social security and competitiveness, which have little to do with Welfare and is drafted according to a deadline of missions, multi-year programs and functions, which is very hard, if not impossible, to monetize.

Furthermore, pursuant to Law No. 234/2012, the Stability Law has also provided that, as from 2016, the Stability Law shall be a Consolidated Act together with the Budget Law.

 This is anomalous, considering that the latter can regulate and create new taxes and duties, while the former cannot.

 However, the Reform of the State Budget, implemented with Law No. 163/2016 adopted on July 28, 2016, was definitively approved with over 80% of votes in Parliament.

 The Stability/Budget Law must be submitted by the Government to Parliament every year by October 15 and Parliament must adopt or amend it otherwise by December 31 of the same year. It is too short a lapse of time. Beyond the initial deadline, Article 81, paragraph 2, of the Constitution provides for the subsequent deadline of April 30 – a term which, however, shall be authorized by law.

 The Stability Law shall mandatorily include: a) the net balance to be financed; b) the balance of the recourse to market instruments, i.e. the final amount of money in the annual or three-year cycle for which to resort to loans (and this is certainly a vulnus, because the speculative markets know in advance the amount that can be financed); c) the amount of the special budget funds – and this is another vulnus, since all the other countries know how much the Services, the Special Operations, the Off The Record actions, etc. will cost; d) the maximum amount for renewing the public employment contracts – another vulnus, because this allows to calculate the industrial policy and, therefore, the possible effects of the labour cost on public and private markets, with obvious advantages for the E.U. competitors; e) the appropriations for refinancing the capital expenditure already provided for by the laws in force, and hence also the three-year stop of subsequent capital expenditure; f) the long-term expenditure forecasts.

 This is another vulnus since this allows to infer the sum available to a State for any E.U. military or foreign policy program, or for any other strategically important program.

 Not to mention the reserves for mergers and acquisitions of strategically important companies within the European Union, or even outside it, but permitted by the other European partners.

 A “mutualization” of the public budget which creates many dangers, but corresponds to the mental level of many E.U. accountants.

 This structure of the Stability Law leads to a situation in which only two choices are possible. Either the so-called austerity policy, when it comes to restoring possible balance to public funds (but this is always decided by others). We may think that a cyclical austerity policy must also be able to spend more on certain budget items, but much less on the others, while here the amount that counts is only the final one, which automatically determines the market behaviour. The only thing that markets have in mind, like conscripts, is the purchase of our public debt instruments at the best price and with the best interest rate, often carrying out trading operations, as also happens to certain States that profit from the difference – often completely rhetorical – between their debt instruments and ours.

 Or there is also the possibility of expansionary spending, which resorts always and only to deficit public spending – i.e. by issuing more public debt instruments – which can be “Keynesian” if it regards investment, but simply expansionary if rents, annuities and current expenses are privileged, in addition to investment.

 Sometimes even this may be necessary.

 The British economist, however, maintained that public spending applies above all to new investment, while for the “old markets” – as he called them – the self-equilibrium of private enterprises is also good.

 The childish idea underlying this conceptual duality is that you can be either “big spenders” (especially if “you come from the South”) or “strict” (especially if you are self-controlled and you come from the North), but this is just a vaudeville skit, not a serious economic policy idea.

 Thinking – as many people within the EU institutions believe – that “family” rigour has an impact on the State budget is a “paralogism” – just to use an ancient philosophy concept.

The equivalence between households and States – a concept often reiterated by unexperienced economists – would be fine only if households could issue face value money, which could be spent immediately according to their needs. These needs, however, would be linked to the credibility of their private “money”.

 People believe in these fairy tales, especially within the European Commission.

 However, the European constraints of any Stability Law are the following: 1) a 3% ratio between the actual and the forecast public deficit and the national GDP – a fully specious and abstruse ratio, even in a phase of restrictive policies; 2) 60% of the ratio between public debt and GDP, another bizarre figure, which may also regard non-Keynesian policies when – for example – a “mature” sector has to be restructured or investment must be made in new and promising areas; 3) the average inflation rate, which cannot exceed by over 1.5 percentage points the one of the three best performing Member States in the sector during the previous three years. Are EU experts aware that there is also ‘imported inflation’?

 This happens when the prices of goods and services purchased abroad rise – although this formula is already quite wrong.

 Inflation is imported when the costs of imported products increase and obviously countries like Italy, which are processing economies, are also great importers. God knows – in these economic phases – how import-related inflation (just think of oil products) is important for the European economies.

 Furthermore, the EU has no strategic, military, geoeconomic and financial ability to change the oil and gas producers’ treatment towards it. The same holds true for the other particularly important raw materials.

 Let us now focus on constraint 4): compliance with the long-term Nominal Interest Rate, which must not exceed by over 2 percentage points the one of the best performing Member States in terms of price stability.

 This is the Taylor Rule. As the U.S. Treasury Secretary Taylor said in 1993, it is an equation in which the interest rate is a dependent variable, while inflation and national income are regressors.

The rule is the following:  ii = i*+α(πi- π*) +βγ+εi

The long-term inflationary target is π. It is the inflation rate that will prevail in the long term. Taylor here assumed that the long-term inflation rate should be 2%, as often happens in the United States, but the current interest rate is π that, only for the USA is a GDP deflator. If we were all just stockbrokers, it might also be true.

 But there are costs that are included in the GDP and are neither predictable nor changeable from outside.

 The actual nominal interest rate in the equation is γ. The rest is easily calculable.

 Hence what does the Taylor Rule mean? When inflation starts reawakening the rates are expected to rise.

 This is not at all implicit in the Maastricht rules, which also stem from these formulas.

 As the Taylor Rule also shows, the increase in interest rates reflects a decrease in the supply of real monetary rates.

  Not necessarily so because there may be many balances available, but with a less “attractive” monetary composition.

Again according to Taylor, investment is inversely correlated with interest rates, but this holds true for the economies that live on loans, not for many of our entrepreneurs who use – almost exclusively – “own resources” or bank loans to secure own resources.

 Because of this pseudo-mathematical sequence of events, if investment decreases, the national income and also unemployment increase – which is here the only cure for inflation. But where did these guys study?

 Another theory resulting from the Taylor Rule is that when the economic activity slows down, the medium-term interest rate must fall.

 This has never happened, not even in the recent U.S. history. Just think of the 2006-2008 crisis.

 It is also strange – and I say so from a purely analytical viewpoint – that the purpose of economic theory is only to reduce inflation, considering that – as already pointed out above – it does not depend solely on the excess of public spending, of the availability of low-cost capital (which, instead, is considered in the Taylor Rule) and the use of “moderate” budgets, according to the theories of the ignorant economists à la page.

 Let us revert, however, to the procedure of the Italian Stability Law.

 According to the procedure known as European Semester, the EU Member States must submit their budgets to the European Commission and the European Council by the end of April, which ipso facto limits our legislation, which also provides for a budgetary role until December 31 of the same current year.

 For the time being, the penalties envisaged for some delays can be reduced, at most, to the single penalty equal to 0.2% of GDP for the year under consideration.

 The principles of the State budget and the related Stability Law are again the traditional ones established by Law 468/1978, including specification, whereby all budget items must be defined analytically so as to avoid ambiguities in their intended use; truthfulness, whereby no revenue overestimations or expenditure underestimations are allowed and, finally, publicity, whereby the budget must be made known with the most suitable means.

 There is also the issue arising from the adoption of Law No. 1/2012, which amended Article 81 of the Constitution, thus enshrining the principle of “balanced budget” in the Constitution.

 It is a laughing matter: since the invention of the double-entry accounting by Frà Luca Pacioli – Leonardo da Vinci’s friend and sometimes drinking companion – all budgets “break even” by definition.

 Otherwise they are not budgets.

 In fact, the term “break even” is never used in the rule. The more cryptic term “balanced budget” is used. We all know that, in physics, the balance can also be unstable.

 As already noted above, it is an unintended funny rule.

 What could we do if the Vesuvius erupted – an event which may be sure in the future, but unpredictable? Would we issue debt instruments, but for ten years at least, so as not to disturb or offend the E.U. accountants and their search for a liquid monetary base for an improbable and incorrectly calculated immediate fiscal liquidity to support debt instruments?

Hence are millions of homeless people to be left in the city of Naples, possibly in the Vomero and Pietanella neighbourhoods, or in the Sanseverino Chapel, waiting for these accountants to decide to study economics and political economy on the right handbooks?

 This is a rule that should not only be deleted, but should also be mocked by some famous comedian, better if with some knowledge of political economy.

 In addition to the “balanced budget” requirement, as from January 1, 2014, Law 243/2012 provided for the establishment of the “Parliamentary Budget Office”, with the task of carrying out “analyses, verifications, checks and evaluations” – thus replacing the role of politicians who should be the sole ones responsible for distributing the resources available and the forecast ones among the most suitable budget items.

 Moreover, in the summer of 2016, Legislative Decrees No. 90 and 93, as well as Law 164, were enacted, which amended Law 243 in relation to the Local Authorities’ balanced budgets.

 Another mistake, albeit a partial one: Local Authorities live on a complex mechanism – on which we need not to elaborate here – of remittances and transfers from the Central State and of sums partially withheld by these Authorities, which are then recalculated by the Central State, again in a too complex way that need not be explained here in great detail.

 In this case, how can we repay the local administrations’ colossal debt? Just think that the European Court has already condemned us for these matters. If the current legislation remains in force, there is no way out.

 In short, the “European cure” on the State Budget has worsened its ambiguities. It has depoliticized the selection of budget items, thus often moving it away from voters’ and citizens’ real needs. It has not allowed a modern solution to the Local Authorities’ financial crisis. It has also devised the funny mechanism of the “balanced budget”, which literally means that there is no longer a provisional budget (hence how can the real items be calculated?). Finally, it forces us into a debt cycle that is both excessive and, at times, burdensome, but always uncontrollable.

Continue Reading

Economy

Coronavirus: Now a two headed monster

Naseem Javed

Published

on

Coronavirus, like a two headed monster killing people on one side the other side global economy; 
The warrior leaderships of rich nations now creating a rain of trillions of dollars to drown one of the heads. Rich nation and their printing machines have just approved trillions of dollars, as this aggressive move will help each other and also less fortunate economies to safeguards global economic order as one global goal.

Most significant is the largest amount allocated to support Small Medium Businesses…
USA alone has allocated 350 billion dollars and many other countries doing similar initiatives, this largest ever, once in a lifetime boost to abandoned and struggling SME of the world may just open a bright new future to transform into pillar of superior performance and a pleasant surprise to all.

Coronavirus is still a global force to reckon while massive shortages may create havocs…uncertainty lingers, the stimulus packages will keep the morale and nations safer.  As rightly mentioned by President Trump, the depression and suicides rates are major concerns.

Today, nation by nation, no other local economic power base as strong as the small medium business economy of the land, and increasingly with technology the same sectors in the unfolding future stand like very powerful pillars; a random collection of many, many millions small medium businesses around the globe, like smart entities, globally savvy, technologically driven, block-chained, AI+AR+VR, entrepreneurial centered creating local grassroots prosperity.

Difficult questions: As most of these funding offered as easy loans;if SME wish no more additional loans or create additional debts to further risk their own future; but what if they rather get smart-help, global-age upskilling and re-skilling for their enterprises or global exportability guidance and customer connectivity expertise, how far will the loans concepts work? Like receiving full y subsidized payrolls or full funded digitization to improve market size. Fully funded programs, on special upskilling and skilling grants to make the fields of SME new upgrading and learning battlefields is another option. With loans only format where will they go out and shop what levels of solutions and how will they uplift on performance and exportability? They were already stuck before, now for fears of new debt, they may remain stuck again. Leadership must explore National Mobilization of Entrepreneurialism Protocols

Simultaneous synchronization of national SME base is the novel art and science of the National Mobilization of Entrepreneurialism Protocols. Not to be confused with some MBA curriculum or export promotion agency guidelines.  Nations without digital platforms on SME upskilling and reskilling beyond post Coronavirus world would look like nations without Internet in the nineties.

Two steps for Midsize Business Economy to advance on grassroots prosperity:

ONE: Identify 1000 or 1000,000 high potential small and midsize enterprises within a region or a nation, and create a national agenda to quadruple their performance on innovative excellence and exportability.
Deploy digitization of top national trade associations and chambers of commences to upgrade to world-class digital platforms so that their entire membership can skate nationally and globally showcasing their goods and services. This is a global age revolution based on entrepreneurial mobilization… study Pentiana Project

TWO: Upskilling, reskilling million small medium businesses and women entrepreneurs across nation:How do you place 10,000 or 1,000,000 SME owners on digital platforms to boost exports and innovative excellence? Why such ideas are not major funding dependent but mobilization hungry and execution starved? What special skills are required to uplift midsize business economy in 2020, how to transform? How did Alibaba generated USD$39 Billion within 24 hours on 11–11–2019, how to optimize? How Round-tables and Cabinet Level discussions are a good starting point?

Rest is easy…

Continue Reading

Publications

Latest

East Asia33 mins ago

BRI to Health Silk Route: How COVID-19 is Changing Global Strategic Equations?

The beginning of 2020 brought a wild card entry into global strategic equations in the form of Coronavirus Pandemic, with...

Newsdesk3 hours ago

The World Bank Strengthens Support to Argentina’s Most Vulnerable Families

The World Bank Board of Directors today approved a new US$ 300 million operation to support Argentina’s efforts to strengthen...

Americas5 hours ago

Why Trump Will Probably Win Re-Election

Throughout this election-season in the United States, there have been many indications that the stupid voters who chose Hillary Clinton...

International Law7 hours ago

Affixing China’s Liability for COVID-19 spread

Authors: Manini Syali and Alisha Syali* The article analyses whether International Environmental Law can be invoked for making China liable...

Europe9 hours ago

Covid-19: Macron’s conflicting crisis communication

2020 started in France with a strike from the SNCF national railway workers who were massively protesting against the ongoing...

Terrorism11 hours ago

The Threat of Nuclear Jihad in Central Asia and Russia

Citizens of five central states have joined the ISIS networks to take the war into the region and inflict fatalities...

International Law13 hours ago

A Recipe for Disaster: Pakistan’s ‘Migratory’ Response to COVID-19 in Pakistan- administered Kashmir

Authors: Aaditya Vikram Sharma and Prakash Sharma* Various news outlets have reported that Pakistan is moving patients from Punjab to...

Trending