Italy is engaged in a race against time to deploy €200bn-plus of European spending power that could radically improve growth and investment prospects for the third-largest euro area economy.
The government of Giorgia Meloni, elected in September as leader of a right-wing coalition, has so far followed orthodox economic and budgetary policies that have generally found favour with international investors. A key factor behind continuity has been an improbably close relationship with Mario Draghi, the former European Central Bank president and Italian prime minister, who stepped down in October.
However, a crucial test stems from planning, spending and monitoring investment from the Next Generation EU fund set up in summer 2020 at the height of the Covid-19 crisis. A revolutionary €800bn European Commission borrowing programme is providing a mixture of grants and loans throughout the EU. With €191bn earmarked up to end-2026, and a further €31bn from national resources, Italy – through its ‘national plan for recovery and resilience’ – is the biggest recipient.
A gamechanger for the economy
At an OMFIF seminar in Rome on the NGEU, organised with Assonime, the Italian corporate affairs and research group, there was widespread agreement that NGEU funds for Italy could be a ‘gamechanger’ for the Italian economy. A control system at the European and regional levels linking disbursement to performance, backed by innovative software tools for guiding disbursements and measuring effectiveness, should improve governance and value for money.
However, several participants voiced concerns about potential hold-ups. This comes against the backdrop of anxiety about the effect on Italy’s public debt of the ECB’s steady monetary tightening since summer 2022, voiced above all by politicians in the Meloni government as well as (in muted form) by Italian officials on the ECB governing council.
Latest strains on banks in the US and Europe caused by rising interest rates have added to nervousness. Britain’s autumn 2022 squalls play a background role. Both Meloni, who was elected on 26 September and took over on 22 October, and Liz Truss, who became British prime minister on 6 September and departed on 25 October, faced severe bond market tensions. Well-placed sources in Rome confirm how the financial market disruption unleashed by Truss’s ill-judged 23 September ‘mini-budget’ have helped influence Meloni’s studiously pragmatic line on economic policy.
Conflict and co-operation
At the joint seminar, Stefano Micossi, a veteran former Banca d’Italia official and long-time Assonime chief, now an adviser, welcomed centralised project management in Meloni’s office as well as close co-operation with the European Commission, where Meloni has surprised many with her initially positive showing.
But he pointed to widespread Italian opposition to large-scale infrastructure programmes and lack of adequate projects. ‘Unless the government succeeds in overcoming this opposition, there is a risk that the disbursement of EU funds is slowed down or halted altogether.’ Despite Meloni’s ‘responsible attitude in its budgetary policies’, Micossi said there was ‘a risk of conflict with the EU authorities that might at some stage unsettle investors’.
Italian officials would like to see the yield spread between 10-year Italian and German government bonds decline to Spanish levels, around 1 percentage point, matching the position in early 2021 against 1.8 points currently. The Banca d’Italia has estimated a reasonable level at 1.5pp-2pp, against a high of nearly 2.5 points last autumn and above 3 points when the Covid-19 outbreak started three years ago.
Underlining Italy’s unwillingness to back wholeheartedly EU orthodoxy, Meloni on 15 March repeated her objections to the euro area’s €500bn European Stability Mechanism support facility. She told parliament that her government would never access the ESM – set up during Draghi’s period as ECB president as an ultimate defence against financial unrest. Instead, she said it should be turned into an instrument for EU industrial policy.
Draghi and Meloni forged a constructive working relationship during Draghi’s 19 months as the technocratic prime minister of a broad-based coalition, when Meloni – head of the Brothers of Italy party with neofascist roots – was effectively Italian opposition leader. The Draghi government, always intended as an interregnum, successfully bridged the gap between a succession of short-lived Italian governments and the September elections that brought Meloni to power. In early 2022 Draghi failed in his aim to become Italian president.
Draghi and Meloni contact continued throughout November, especially on international matters, but has been attenuated since then, because both politicians are concerned about criticism that Meloni is following too strongly the policies of her predecessor. NGEU disbursements, if properly managed, could add 1pp-1.5pp to annual Italian gross domestic product over the next 10 years, raising downbeat expectations compared with the 0% to 0.5% growth generally seen as Italy’s growth potential hitherto.
Delays and European scepticism
But as well as worry about delays caused by bureaucracy or by changes in political priorities, there is concern that the stimulus would peter out if the NGEU – as currently foreseen – is a once-and-for-all programme and fails to become a full-scale permanent facility. ‘This is a huge task… it cannot be a one-off,’ said one high-level seminar participant, adding that it should be complemented by long-delayed completion of European banking union and capital markets union, which he dubbed ‘financial union’. On top of the supply-side advances triggered by NGEU support, there was also a need for a comprehensive demand boost through a common fiscal programme, this participant said.
Disbursements are being watched closely by countries in northern Europe, traditionally sceptical about Italy’s ability to spend public money wisely. German government officials are monitoring Italian disbursements for signs Italy is lagging in commitments. One senior Italian figure said payments will have to be expanded ‘at a solid pace’ to keep in line with planning. He added that rising prices of energy and construction materials represented big structural reasons for slowing spending.
Another top participant hailed the importance of IT tools, a big focus of the seminar, in helping to improve spending allocations and monitor effectiveness. He said the summer 2020 decisions on Italy’s recovery plan would have benefitted from earlier advances in developing such instruments. ‘Italy’s stagnation and high public debt are one of the major issues for the euro area,’ he said. ‘It is very important that we tackle this… We have common challenges, in the field of climate change, for example. We need effective implementation through a new civil process. Each Italian government has to focus on this.’
Some participants drew comfort from the relatively late disbursement of NGEU proceeds on the grounds that these will be feeding through to the Italian economy at a time when ECB largesse through government bond purchases has faded. However extended delays will be widely seen in Italy and beyond as a sign that the Italian government is not serious in its European policies. According to one highly placed delegate, ‘Italy is crucial to the credibility of the entire NGEU process. Decisions coming up on implementation are crucial. We are approaching the moment of truth’.
David Marsh is Chairman of OMFIF.