2023 OUTLOOK

Economist and management and organization expert. She was elected a member of the Italian Parliament and then of the European Parliament, where she currently holds the position of president of the Committee on Economic and Monetary affairs. She is currently deputy secretary of the Italian Democratic Party. However, Irene Tinagli is first and foremost a Bocconian. She graduated from Bocconi University with honors, before earning her PhD at Carnegie Mellon. Her story is a successful example of a merge between knowledge and politics. We discussed with her the difficult landscape of European economic policy in this historical phase.

To talk about the current situation, one can only start with inflation and the burden it imposes on families and businesses. Can the EU do something to help the ECB?
On the subject of inflation, the spotlight is obviously on the European Central Bank, but the ECB can only use the tools at its disposal. The ECB's traditional policy instrument of raising rates alone is not enough.
The dilemma we have in the European Union right now is to face objectives that would require different tools: the slowdown in the economy would suggest economic and monetary policies that are not too restrictive, while galloping inflation would suggest a fairly decisive rate hike. At the same time, however, we must also make further considerations on the composition and nature of the inflation that we have today in the EU: the inflation that we register is in fact not so much linked to an overheating of demand, but mainly to supply issues and production costs that have soared above all due to gas and energy price increases. It is therefore necessary to coordinate monetary and fiscal policies, but in this specific case a third element must also be added: intervention on energy markets.
The hike in energy prices is "infecting" many sectors and driving up inflation, even indirectly. For the ECB, this contagion of inflation is an element of risk on which it must intervene, with interest rates because it has no other tools; but we could (I would say we should!) introduce a structural reform of the energy market. This is what we are trying to do by asking for an uncoupling of energy coming from renewables from the price of gas, so that total energy prices do not only reflect trends in gas markets; or when we ask for interventions on the functioning of the Amsterdam spot market. We have also asked for a cap on the price of imported gas, although, of course, only temporarily.
Economic and fiscal policies can also be useful: member countries are putting in place measures to help households and businesses pay their bills but even these encounter limits: the budgetary margins of individual countries. Even at the EU level, it is not simple: the Recovery and Resilience Facility is still active, there €750 billion of common debt that still need to be spent, and it is not easy to raise further common debt. And, in any case, it would not be easy to use it to disburse subsidies. The European Union has already modified the state aid framework to allow governments to give aid to businesses and households on energy bills, but adding EU funds to these efforts is a complicated step in my opinion.

What can individual states do instead, with existing resources?
It is important to try to intervene through temporary income support transfers to cope with growing expenses rather than intervene on prices or on collective wage bargaining because these are all mechanisms that could generate inflationary pressures. We need to take great care, because it is a very delicate moment and we must be able to coordinate policy at all levels. Objectively, it is not easy because after two years of Covid the debts of governments have all shot up even by 20-30 percentage points. But we have to find a solution.

However, Italy has a large stock of public debt that greatly limits the scope for intervention.
Italy has this difficulty. Now there is a somewhat paradoxical aspect: high inflation slightly increases nominal GDP and slightly reduces the share of debt; and VAT revenues on energy products have also increased. These are elements that in the last year have allowed us to buffer the situation a little but it is obvious that Italy is one of the countries in greatest difficulty today, because it has a particularly energy-intensive production structure and has an energy mix where renewables are not yet sufficiently present. We also imported gas largely from Russia.
And with the prospect of zero if not negative growth for 2023, and a very high debt in any case, it is clear that in the coming months we will have more limited margins than other countries to intervene in support of the economy with subsidies, transfers and so on. We did it during the pandemic, we did it in the last year with almost €66 billion allocated by the Draghi government to cushion the increase in energy prices, but now we have reached a point where it is necessary to make more structural interventions on the energy market and also try to push towards European solutions.

Is a reform of the Stability Pact possible in this situation?
Already last year the Commission said that it would present a proposal in 2023, and it is necessary, because although it is true that the safeguard clause has been activated, it is also true that we cannot get to the end of 2023 without having a new setting or we risk going back to the old rules. The Eurogroup and Ecofin have picked up the issue again. The question is: what can be the equilibrium point, the bargaining solution that all countries agree on? It's not easy because there are so many different perspectives. Needs are known to all: to guarantee a minimum of macroeconomic convergence and stability across the EU, but also not to penalize investment and growth as the old rules did in the past. The new ones must not be pro-cyclical.

How? It doesn't seem like a simple task.
This is the crux of the matter: what are the systems we can put in place to support investment and give countries a bit of flexibility, without letting public spending spiral out of control. There are those who speak of the golden rule: separating public investments from the calculation of the deficit. I think it's difficult because this rule is open to a thousand different interpretations and a thousand different requests.

Everything becomes investment..
Limits can also be introduced, but then there is the country that invokes the golden rule for defense spending, another for innovations, another for green areas, another for social issues. There is also a measurement problem: what exactly needs to be kept separate? One can think of a European fund that supports EU-wide investments, somewhat along the lines of the Next Generation model, with staggered disbursements linked to the achievement of intermediate results; it's an idea that could work to dispel doubts about moral hazard, opportunism, and so on. However, the problem of how to finance this fund arises. The EU budget is currently not equipped to deal with this type of funds and investments.

Can we envision a revision of the Treaties?
I don't think there is room for rewriting the EU Treaties, not for changing 3% or 60% of the text.. What will be inevitable in my opinion is to revise regulations whereby each year every country must reduce excess debt by 1/20 of the debt it has already accumulated. In my opinion this needs to be changed, and it seems to me that there is a broader agreement on the issue. Among other things, intervention in regulations is simpler than a revision of the Treaties.

The new geopolitical situation seems to call for a return of industrial policy. Do you also see this trend?
In recent years, the European Union had already begun to move with resources for special projects that support innovative technologies, for example the production of batteries and now, with the Chips Act, incentives to manufacturers of microchips in Europe. Actual industrial policy remains in purview of member mtates, but with initiatives of this kind the European Union provides indications (and tools) on technologies or productions that are considered strategic, to favor reshoring in Europe, to undertake investment in innovation and research which is always a bit difficult to increase. I think it is a first way to strengthen strategic independence in some industries. It is clear that if we want to have European champions, we also need to revise a bit how we interpret the issue of market competition and state aid, and also that of building a truly single market. We have a common market for the transport of goods which is precious but we still have 27 different national legislations on taxation, finance, capital raising, and also the banking union needs to be completed to further encourage cross-border operations within the Union. So it is clear that we must make great progress on these fronts.


Bio
From Empoli to Milan, and from Milan to Pittsburgh, at Carnegie Mellon, and then Gothenburg and Madrid, and of course Strasbourg, the seat of the European Parliament. Bocconi has opened many doors for Irene Tinagli. "Bocconi was an extraordinary experience. I came from the Tuscan province and for the first time I landed in a big city: it was a step towards the outside world. It was an extraordinary experience not only in terms of education, but because it was also a very diverse environment. It was a great training ground for me, with great international openness, so a way to get to know the world". Moreover, Bocconi "in the space of a few years established itself on the international scene with great authoritativeness, strong determination and high quality. Bocconi has succeeded in the dual undertaking of expanding the educational offer and improving quality standards, not a trivial thing to do".