NEXT GENERATION EU AND THE MORAL HAZARD

The European Press reported the conversation between Mr Sch?uble and Mr Draghi on the moral hazard, respectively, for and against to use it as a tool to apply when dealing with Next Generation EU.

The matter has been commented from various angles almost in Germany and Italy. A.Q. Curzio said "Draghi knows very well like (almost) all of us that the Italian public debt on GDP was excessive even before the pandemic and that with the National Recovery and Resilience Plan we have to change policies with little current spending and many investments”, R. Brunetta (Minister) “Italy is changing .. thanks to the Mr. Draghi credibility ..It will be a deep and structural change”. P. Benassi, Italian Ambassador with EU talked on the topic in an interesting and comprehensive interview: “Nella misura in cui saremo capaci di restituire quanto tolto alle nuove generazioni non ci dovrebbero essere alternative al prolungamento del NGU” https://formiche.net/2021/06/biden-lue-e-il-g7-di-draghi-intervista-allamb-piero-benassi/. Here, our contribution to the discussion.

Imagine you are a banker evaluating a loan application whose applicant does not provide all the information or is reticent for whatsoever reason; however, both actors could provide asymmetric information for other purposes than the subject of the transaction. Here calling in cause the moral hazard is technically correct and both banker and debtor take a risk. In case of non-repayment, for the former the loss of the interest (€ 1-2) is almost negligible compared to the loss of principal (€ 100); the latter will be included in the list of defaulters and will hardly obtain credit from other sources and in any case, he will have to pay exorbitant rates and halter clauses.

As it is well-known, some European politicians would like to have the non-respect of the budget constraints as a temporary measure while others would like to have it permanent. The so-called frugal Countries aim to restore the Stability Pact, believing that it is the right way for growth, while others aim to postpone the exemption from the Pact, not because they are spendthrift Countries, but to get back the wealth unduly held for previous unsustainable European financial policies, which didn’t produce real wealth but virtual affluence (financialization).

It would seem a dispute between Keynesians and Monetarists. But it is not. Draghi said: "I am an economist and I read the numbers" and further on, he made the "distinction between good debt and bad debt", the former serves sustainable growth by creating jobs and promoting opportunities, the latter simply doesn’t produce anything or worse it is a danger for the economy.

In this understanding moral hazard, although correct when referring to the relationship between creditor and debtor, is not applicable to the Stability Pact. In fact, the development financing equation contained in the Pact includes several variables beyond and above the credit contract, such as solidarity, equity, sustainability of the natural and economic environment, social cohesion, redistribution of refugees, security in Southern Europe, respect for civil rights and other constraints / obligations, which determine the reasons for being together.

Moreover, referring to the NGEU, at stake there is much more than the unpaid debt. The real issue is to "retain power" from those who currently hold it. As it is well known, the ultimate goal of the banker and any investor goes beyond the interest on the credit granted, but it aims to manage the debtor's budget and therefore his strategic choices. This is true for the lender around the corner and the big finance players (World Bank, IMF, BAfD, etc).

To the extent that the above reasoning is shared, "the problem solution has to be found in the equation responsibility” (Piero Benassi), which the Frugal haven’t taken into account.

Today we learned that the European Summit on the relocation of migrants ended with nothing. It should be noted that the Eastern countries begged to be admitted and now deny the solidarity; moreover, Germany sends refugees back, Holland has an offshore fiscal policy, the Mediterranean is no longer the Mare Nostrum/European Sea, but Libyan, Turkish, Egyptian and Russian. To conclude, either we all agree on rights and duties, or the reasoning of Mr. Sch?uble does not hold up.

Ascanio Graziosi, Economist & Publicist - Owner, Innovative Financial Inclusion Solutions https://ascaniograziosi.net