Out of the Tunnel. Thanks to Finance
THE USE OF PRIVATE RESOURCES TO RETURN TO GROWTH AND EMERGE FROM THE CRISIS IS A PATH THAT IN EUROPE MUST BE UNDERTAKEN WITH DETERMINATION. TAKING CARE TO SET THE RULES OF THE GAMEby Stefano Caselli, full professor at Department of Finance
The coming months are decisive for many European countries. Economic policy choices will have an impact that transcends the same economic dimension as the ability to ensure robust and healthy growth has social impacts ranging from employment to reducing social gaps, poverty reduction. However, these choices have to face three fundamental variables: GDP growth, public debt growth and bank stability. This means that the real risk to avoid is to go through this New Year by giving little growth but by increasing public debt and weakening the banking system. The spaces and times to act are all there. However, it is necessary to fix some "rules of the game" that must be accepted at the time of the definition of the intervention schemes (both below and outside the Recovery Fund), and their implementation. Such rules of the game are those that allow managing the triangle between growth, debt and stability of the banking system and are the following: a) financial resources do not come solely from the State and the Recovery Fund.
Available savings must be used and therefore financial markets and financial investments play a decisive role; b) PPP (public-private-partnership) schemes have a powerful function of multiplying the effect of public choice through private financial resources; c) fiscal leverage plays a decisive role if it permanently directs companies towards virtuous and growth-oriented behavior; d) the banking system must be used as an instrument that multiplies the intervention in favor of the economy, alongside both PPP and fiscal incentive schemes. That is why financial markets and investment play a decisive role, and economic policy decisions must be used permanently.
Firstly, the use of the financial market and the involvement of investors (private equity, venture capital, PIR) in support of corporate equity should be promoted. The risk to be avoided is that of a State control in the intervention in risk capital and of a crowding-out of the market. The way is instead to find the conditions so that the intervention of the State is used fully and follows the logic of flanking private capital. There are two fundamental considerations: a) investors in risk capital, listed and not (therefore venture capital, private equity, PIR, business angels and incubators) must be valued with a clear incentive on capital gain, which is the real element that creates the market and therefore attracts investors by generating liquidity; b) State intervention must take place either with a clear and independent market logic or through the necessary support to private investors.
Secondly, we need to think about the issue of bank credit and the role of the public guarantee, defined in the early days of the crisis, in Italy and in many European countries. The use of the banking channel, although it may be useful in the immediate future, already creates a negative impact in the short term: companies become more indebted and the space for obtaining credit in the future can be reduced. In the long term, the maintenance of the State guarantee should be anchored to a capitalization logic: the State guarantee on the credit is granted only if the company proceeds to a capital increase defined on a fixed percentage of the credit.
Finally, again on the debt side, the use of bonds with a maturity of more than ten years, with interest linked to the recovery of turnover or the development of infrastructure projects is the choice to be made. Which leads to a variety of solutions that extend to bonds dedicated to individual production chains or to individual territorial clusters or social bonds with a logic of deep intervention in areas that need real reconstruction. The important fact is that impact bonds allow to intercept that demand for investment so widespread (both individual investors and savers that institutional investors such as pension funds) and looking for real underlying performance and achieving goals that can be qualified as ESG. Finally, it should be noted that the use of bonds by companies helps to strengthen their financial structure and thus their ability to obtain further financing from banks. In this respect, the size of the tax incentive should be targeted both at user companies and at investors.
The path of the financial market and the use of private resources in Europe is one that must be pursued resolutely. Let us avoid waiting by looking at the taximeter of the public debt of many countries that runs inexorably, because otherwise the temptation to use those resources available to bring down the public debt will present itself on the policy makers’ decisions table.
