The budget policy in the European Union after Maastrich
Andrea Monorchio

_{1. Part I}

I am very pleased to have been invited by the Public Budget International Association and to be with you today because, like yourselves, I work with budgets.

It is my intention this morning to speak about the budget policy in the European Union after the Maastrich Agreement and I hope to be concise. But prior to this, perhaps it is necessary to tell you what my work consists of in my country. The title of Contador General del Estado, which the French refer to as Comptable Général de l'Etat, and that the British know as General Accountant, does not exactly correspond to my function in strict terms. My position also involves that of General Budget Director, Finance Controller and State General Accountant, a high administration body. The State General Accountant is an old institution. It was created in 1869 during the Italian Union. It is 130 years old. The President of the Ministers' Council considers it as a monolithic structure, in which the sole sovereign is the State General Accountant. The presence of ten strong-personality General Directors with ten General Directions, does not affect, or at least it has not affected so far, the authority of the General Accountant who is at the top of this institution. The Budget's function, besides the economic one, is the State General Accountant's participation in the decisions made by the Ministers' Council. No action is debated by the Ministers' Council without the State General Accountant's prior analysis.

Likewise, no action is discussed by the Parliament Balance Committee without the prior analysis by the State General Accountant. This does not imply that the State General Accountant has the possibility of veto. But the State General Accountant may express his/her opinion. Throughout my lengthy career, I have often said that the name of General Accountant is a heavy burden, because it is published in the dailies and immediately informed on television when it becomes known. This always creates many problems. Not problems for myself because I carry out my task as an official. The Government has never menaced the General Accountant. It accepts the criticism. Period. The political consideration prevails over the technical one and the provision is approved even against diverse opinion. It is a complex function. It has ten General Directions which belong to the Central Structure. The Accounting Offices are distributed throughout the 102 Italian Provinces, which are linked to the Center by a large information system. Yesterday, I had the opportunity to visit the Accounting Office headed by Ms. Gioacchino and to verify that, like ourselves, they also render the State general statement of accounts within the six months corresponding to the end of the fiscal year.

But as far as I am concerned, this function is secondary with respect to the others.
I have held office as State General Accountant since September 1, 1989, and after so many years I believe that I receive some merit for Italy's participation in the European Union and a position in my country's history for the remedy of public finances.

When the Maastricht Treaty was signed..., perhaps I should briefly refer to the Maastrich issue.
Italy had a deficit relation due to the net debt of the public companies. There are numerous public finance patterns in my country. There are the state sector accounts and the public sector accounts, which are financial accounts. Then, there are the accounts of the public administrations, that is the economic account, drafted according to the SEC system, that is to say, the European System of Accounts.

Maastrich requires that all ratios be verified according to the European System of Economic Accounts, controlled by SEC. At present, the SEC 79 is being used, next year the SEC 95 will be applied. The Community, the European Community statistics offices, EUROSTAT, have changed the system which will be distributed among all member countries.

When the Maastrich Treaty was signed, Mr. Guido Carri, a great Italian economist was the Treasury Minister and also the Governor of the Bank of Italy. I was appointed State General Accountant and my appointment was presented by the President of the Ministers' Council to the President of the Republic, specifically Mr. Guido Carri. It is a great honor for me that a renowned economist has appointed a person of only 49 years of age to act as State General Accountant.

The Maastrich Treaty provides four main rules and proposes the conditions for the macroeconomic convergence of the Union member countries' economic policies. The analysis offices of all the central banks, the analysis offices of all the European Ministries of finance, knew that without the macroeconomic convergence it was impossible to carry out the monetary union.

The standards chosen in the Maastrich Agreement are arbitrary standards. They have no theoretical basis. The public administrations' net indebtedness ratio –gross domestic product, deficit-gross domestic product of 3%, the 60% ratio between the public debt and the gross domestic product–, are figures with no theoretical basis. Why? Simply because it was observed that for several years Germany had kept its own currency stable while having a deficit-gross domestic product ratio of about 3% and a public debt-gross domestic product ratio of 60%.

At the beginning of 1997, no one even considered that Italy participate in the European Union because the deficit-gross domestic product ratio was equivalent to 6/8% and it had to reach 3%. The public debt was higher at 123%.

By the end of the year we find the following: with reference to the other two economic standards, the Maastrich Treaty provided that no country could have an inflationary rate over one point and a half of the inflationary rate average of the three most divulged countries.

By the end of 1997 Italy had 1.8%. It was easily within the average required.

The same happened with the interest rates. The interest rates of each Union member country could not exceed by two points the average interest rates of the most virtuous countries, even in rate matters: the reference rate, the Benchmer securities interest rate both in the medium and in the long term.

For a better understanding of the effort made by my country, I will remind you of the following: at the beginning of 1996 the difference between the Italian rates and the German rates exceeded 450 multipast.

By the end of 1997, the difference with the German rates decreased to 60 multipast.

By the end of 1997 we achieved a 2.7% ratio, lower, therefore than 3%. As regards the debt, we decreased to 121%. This gave rise to controversy within the European Union because it was said that Italy had not respected the standards. This is not true. Section 104, letter C, of the Maastrich Treaty states that a country may participate in the European Union if it proves that it invested the tendency and that it may significantly proceed to the 60% goal. We will attain 60% in the year 2010/2012 depending on the economic growth.

In this sense I must say that this controversy had no grounds, because the characteristics of the Italian public debt are very special. Italy has a zero-level debt. All economists know what the zero-level debt consists of. It is solely a domestic debt. We have no foreign debt. We have a structural profit of the balance of current payment and all economists know that the structural profit of the current balance of payment leads to the termination of the foreign debt.

Besides this, in 1997 we had earnings a little over one third of the current earnings of the balance of payment of the European Union. Italy is an export country of savings.

Argentina saves 17%, probably because Argentina has 15 million inhabitants of Italian descent. This Italian origin leads to a very high savings tendency. In Italy the savings trend amounts to 19%.

We have never created displacement effects with respect to other countries. The Italian securities were subscribed by Italians. Therefore, the worry that other countries experience regarding the lack of stability does not exist in Italy.

Let's apply the beetle paradox. The beetle is so heavy that it should not be able to fly. Yet it does not know this and therefore defeats nature and indeed flies. Italy did so and we entered Maastrich.

Maastrich, Holland. In July 1997 the stability and growth pact was signed in Amsterdam. It is Holland's destiny to remain in the history of Europe and in the world history.

The European Union continues after 45 years since the famous speech delivered at the Bundestad, the German Parliament, by a great German statesman, also destined to remain both in the German and in the world history: Konrad Adenawer. On December 15, 1954 Konrad Adenawer said to the German Parliament members: “Europe's political union was the dream of few, it became the hope of many, today it is a necessity for all”. This phrase was quoted by Helmut Kool on April 2, 1998 in the same Bundestad room. This hope, this presage, was fulfilled after 45 years.

The stability and growth pact took place in 1996. As of January 1, 1999, out of the eleven Community member countries –and of the 15 which had started– four did not participate in the Union: three of them of their own will –The United Kingdom, Sweden and Denmark. The other country, Greece, did not participate for failure to comply with the basic macroeconomic requirements.

As from January 1, 1999 the eleven participating countries lost their monetary sovereignty.

I chose this topic because Argentina also chose voluntarily to lose its monetary sovereignty.

For the first time, a monetary union has been carried out in the world without having the union of the budget policies as a correlation, that is to say, having no political unity as a correlation. This is an extraordinary event. An event closely observed by the economists worldwide. I believe this is a very important fact. Yesterday, I pointed out to my colleague Ms. Joacchino, the importance of the existence of few currencies in the world. The world, in the first century of the third millenium will be dominated by three currencies: the Euro, the Yen and the Dollar. Today, March 9, in the financial markets world wide, the volume of the operations is hundreds of times higher than the amounts of the reserves of all the banks in the world, which means that if the speculation ventures upon a certain currency, such currency has no possibility of resisting. A currency must have a healthy economy to survive. Otherwise, it may be attacked.

This does not occur if few currencies exist. Speculation may not act over a floating of millions and millions.

This is, certainly, an extremely important fact.

Let us go back to the stability and growth Pact. Jopin had the word “growth” added to the ECOCLIN during the Finance Ministers Meeting in Dublin. The Pact, which is composed of two Directions and two Regulations, gives neither instruments nor resources for the growth. The growth is entrusted to the autonomous capacity of each country's administration.

What does the Pact say in synthesis? It states that all the Monetary Union member countries must have zero loss, that is to say, equilibrium in the balance sheet, or else, earnings in the balance sheet. This rule is very severe, more severe than the Golden Roll. I taught my University students that investments are financed by indebtedness. The Pact forbids indebtedness. Thus, when every country has reached the balance sheet equilibrium, the fiscal pressure –all income represents fiscal pressure– will cover the total expenditure.

Currently, in Italy, the fiscal pressure is opposite from the past. A transfer amongst generations. We, white-haired because of the fiscal pressure, will pay the infrastructures and the investment expenses for our children, for our grandchildren, which opens the Nation's production capacity.

I do not know how or when this will happen. What I do know is that these are very important issues, upon which there is already much pressure in Europe.

But I consider the equilibrium rule in the balance sheet of main importance. Europe is not an ideal value area. The economists define the ideal value area as that in which there exists flexible labor laws, when the prices can be readily adapted, when there is the possibility of having no productive duplication. In a value area that is not ideal, there is, what the economists (we are not economists) always define as shock. An asymmetric and classic shock of a non-ideal value area.

The United States of America is not an ideal value area. But in the United States of America the Federal Budget covers 35-40% of the drop in gross domestic product which may be verified in one of the Confederation counties in case of an asymmetric shock.

In Europe this is not possible because the European Union budget is only 1.10% of the community GDP, for which each country must fight against the contingency by itself and with its own budget.

Therefore, as of January 1, 1999, Italy, Germany, France and Spain no longer have the exchange maneuver, that is to say, the interest rate.

The monetary policy, which is one of the basis of a country's economy, passed unto the sovereignty of the European Central Bank of the Central Banks system.

In order to counterbalance the other contingent actions, the unemployment, etc., a country has only the Public Budget at its reach.

We must therefore reach a zero deficit because only on reaching zero will each country have the opportunity to have the maximum possibilities to act in the Public budget, since 3% may not be exceeded.

No country may exceed it. If a country surpasses 3%, it incurs in the so-called Excessive Losses Proceeding and the European Union immediately intervenes in order to place that country once more within the 3% limit.

There is also a fine which may amount to 0.5% of the GDP. For Italy, which has a GDP of two million milliards of liras, this would imply ten thousand milliards. This means a very strong proceeding.

As regards the Italian stabilization system we must decrease to 2% in 1999. In 2001 to 1 1/2% and to zero in 2002. But this depends primarily on the economic growth.

By mid 1997 the Asian crisis created growth problems worldwide. The crisis was transferred to Russia and from Russia to the South American countries.

In Japan, it is the second consecutive year that a negative growth has been foreseen. A two and a half per cent wealth loss occurred in 1998, a negative result if it were to be repeated in 1999.

The European growth showed a downward tendency. The European growth average was approximately 1%. Italy, in 1998, grew by 1.4%; 1.1 point less than what was predicted by the government in September 1997, which was 2.5%. The estimation for 1999, calculated at 2.5% will not exceed 1.5%. Currently we are in zero, this means that in order to reach 1.5% the growth profile must lead us to have 3% in the month of December, otherwise, 1.5% will not be reached.

Nevertheless, we did important things in the public finance sphere. By the end of 1997 we had primary earnings. All of you know what the primary earnings are. Income less expenses and the interest remains.

The interest expenses in the Italian budget are very high, the same as in the Argentine budget. We had earnings over 6% of the GDP, that is to say, over 130,000 milliards of liras. It is a huge figure. It shows the sacrifice of the Italian people to remedy the public finance.

The primary earnings will remain at 5%. In 1998 the earnings amounted to 4.9%. In general terms, 5% in all levels is planned to be maintained because we must fully eliminate the public debt.

A main concern, not so much in the Latin American countries but in Europe and Japan, is the demographic problem.

I mention it here because the demographic issue is a very important problem.

My institution designed a demographic scenario for Italy which covers a fifty-year period. From 1994 to 2044. The scenarios that we made on the basis of the birth and mortality tables are sorrowful. Sorrowful for my children, sorrowful for my granddaughter. I have only one granddaughter.

In the scenario which we consider more realistic, in the period of time indicated, the Italian population will pass from 57,000,000 inhabitants to 44,000,000. Thirteen million less. This means to say that the population will be reduced by 23%. The elderly which in the demographic definition are those over 65 years of age, will increase by 135%. The young will decrease by 22%. The elderly aged over 80 pass from 4 to 11%. This demographic scenario, this demographic hecatomb, defines largely different conditions in some great expenditure sectors: the retirement pension, health, the education sectors. We did not carry out the study because we are professionally interested in demography, but because we were interested in knowing the demographic movement in order to become aware of the effects on the large sectors of the public expenditure.

We need a population of 7 or 8,000,000 inhabitants. Italy is a multiracial country. In my country, maybe some people give no importance to the issue because reference is made to France and to England, but I consider these references absolutely wrong because both France and England were colonialist countries. Italy was not a colonialist country. Italy is not used to an important and imposing extra-community immigration.

But we must get used to this and adjust the economic estimates. I think the Argentine economists must also do so. The American economists have already done it. As regards the part of the world I live in, the parallel 80 –which passes through Messina, Sicily–, we are involved with the African continent and some Mediterranean countries. This is an undeniable truth. Italy, France, Spain, and Portugal have been warned against this, and although Portugal is not a Mediterranean country, due to the territorial continuity with Spain, its seems like a Mediterranean nation.

At the Essen conference, Germany requested aid for the Eastern countries, because Germany has influence over the Eastern countries. This was agreed upon. But the Mediterranean countries demanded that if the Eastern countries are given 100, then the Mediterranean countries must be given 70. This position was ratified at Barcelona's conference and recently at Palermo's conference.

My statements about Europe and the African Continent are valid, in my opinion, for the American continent.

The United States has experienced growth rates, which all economists agree appear to be absolutely unimaginable. The largest country in the world, which grows at a pace of 3.5% with an unemployment rate of 4.5%, a rate implying full employment. A functional unemployment that exists in any economic system is necessary to make a change.

But, what stimulates this growth? It is stimulated by the “capital gates” of the strength income. Because the American saving amounts to 3.8% whilst consumption reaches 25%.

Greenspan explained it very well and I share his opinion. The consumption impulse in the families is an impulse resulting from the fact that they earned a lot with stock shares which experienced very significant increases.

We all know that, in the classic equation, for maintaining wealth, wealth is equal to consumption plus investment plus exports minus imports.

Then, the United States must also take care of developing South America: Argentina, Chile, Paraguay. Then, for world progress an important development of Argentina is estimated for the first years of the next century. I will not see it myself, but I like to make estimates. Maybe in the other world I can verify if these estimates were right or wrong.

The Confindustria Italian report stated that the United States' budget was a budget of billions of dollars of earnings. For me, being involved with budgets, either the United States takes a lot of money from the citizens' pockets (the government should not close the accounts in this manner, the government must render services) or else the government does not comply with some of its functions. In this case I consider that the government does not comply with some of its functions, because in the United States, along with two hundred million rich Americans there are several millions of Americans that know abnegation. For me abnegation means misery and contempt, something that is not considered in any European country.

And if we think that the United States budget is 34%, there exists the paix of the Americans in the world, meaning that half of this budget is destined to expenses.

The social state problem is very important and it must be reviewed carefully.

In Italy the expenses for retirement pensions, amounting to 16% of the Gross Domestic Product, represent a very high expenditure.

We must supervise and be very attentive. We also introduced a very important reform in the retirement pension regime, but we must be very alert because the expenditure demanded by this regime may give rise to new instability.