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Paying small firms on time: impossible

Sometimes I am asked whether my only solution for this crisis is raising public expenditure for goods and services. No: anything that raises growth now is ok with me.

Take for example the recent law approved in Italy following the European Small Business Act: one measure contained in it has a provision to reduce the delay in payments by the public sector. In Italy a firm has to wait on average 218 days (Bank of Italy) to be paid for its sales of goods, services and works to the public sector.

Imagine what it would mean to bring that number down to 60 days in the current environment: liquidity constrained firms that are often forced to close down or  not to participate to tenders of the public sector procurement would find new life, buying, selling, generating more employment, profits, participation and competition in the economy.

But the new law postpones the adoption of this growth enhancing measure for 1 year and reserves it only to new future sales of firms to the public sector not considering the 60 billion euro of commercial debt already outstanding. Why, you may ask?

I am at loss to tell you why the delay for 1 year since governemnt could end up having now more participation in its tenders and less costly bids and so gain from it.

But I have instead a simple and dramatic explanation as to why the Italian Government does not consider reimbursing now the 60 billion euro owed to firms.  Because that would mean turning a commercial debt (not considered by Eurostat in its public debt to GDP figures) into a marketable debt (since Governemnt would have to borrow to find these 60 billion euro) which would enter the debt GDP ratio.

So if we were to reimburse firms for what they are owed the official debt GDP ratio would go up, while the true debt GDP ratio (which already accounts for commercial debt) would remain the same. So what do we do? Instead of telling Brussels and the European Commission “listen let me help SMEs and growth, my true debt will not change” we fear their reprisal, avoid helping SMEs and keeping the true and fake debt at their current levels. The fear of fake accounting prevents true growth. If this is not masochism European style, you tell me what is.

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