As Italy plunges into chaos, how will EU restoration funds ultimately be used? – Thebritishjournal

Italian Prime Minister Guiseppe Conte’s draft recovery plan based on €209 billion ($254 billion) to come from the EU’s post-pandemic recovery fund and meant to crank up the ailing southern European economy has led to the nationplunging into political chaos as two ministers from Matteo Renzi’s Italia Viva party quit on Wednesday to show their opposition to Conte’s plan.

In September 2019, the populist Five Star Movement (the largest ruling party), the Social Democrats (PD) and the smaller parties Italia Viva and Liberi e Uguali formed a coalition, which had been viewed as a makeshift solution rather than a team of shared values. 

Conte’s ideas on how to spend the EU money were not accepted by the head of the Italia Viva party, Matteo Renzi, who had repeatedly warned he would sink the coalition government, if not enough money were pumped into innovative projects.

Although Conte said he had made a number of concessions to placate Renzi, the latter raised other issues that he was not content with, including Conte’s unwillingness to apply for a loan from the eurozone’s bailout fund, the European Stability Mechanism (ESM) to strenghten the nation’s health service. 

Moreover, Italy’s head of government wanted a council of unelected executives — rather than lawmakers — to decide on how to use the EU funds which Renzi called an insult to parliament.

Renzi, who was the prime minister between 2014 and 2016 until he resigned after a constitutional reform initiated by him failed, had complained that not enough resources from the EU were slated to go toward promoting investments in future-oriented industries.

“Renzi may have his own political axe to grind, and yet he’s addressing an important issue,” Friedrich Heinemann, a European affairs expert at the Leibniz Centre for European Economic Research (ZEW), told DW. “Over the next couple of years, the EU will be spending a hell lot of money but has put little thought into how to channel the allocated resources in a meaningful way.” Heinemann fears the money might not yield the desired effects.

Lost decades and squandered EU aid?

The race among lobbyists in Italy to present the most opportune spending program is alarming. “There’s a big danger that the Italian reconstruction program will only inflate the state sector and social benefits without really advancing the country,” Heinemann said.

EU aid funds, which are being paid out on the basis of a debt-sharing scheme for the first time, are meant to pave the way for Italy’s economic upswing in the decades ahead.

Italy gets €85 billion as a grant and the rest €124 billion in the form of low-interest loans. The EU’s record shot in the arm called Next Generation EU is viewed by economists as the last chance to overcome Italy’s long-term crisis.

According to preliminary calculations by the country’s central bank, Italy’s gross domestic product last year — that is when the pandemic hit the nation — plunged to 1998 levels. The country sits on a debt pile of €2.5 trillion, the highest debt load of all EU member countries, with only few nations logging a higher debt even globally.

Brussels’ wish list

At first glance, Giuseppe Conte’s investment program contains all the points that are seen as priorities by EU Commission chief Ursula von der Leyen. There’s a mention of a green revolution and ecological transition alongside the promotion of digitization, innovation, sustainable mobility and gender equality.

Another favorite topic in Brussels, notably cohesion, is also there as Conte’s plans include “the financing of social and territorial cohesion” across the southern European nation. Conte himself hails from the poorer south of the country that has depended on subsidies from the federal government for a long time. This is why people in the richer north and the central parts of Italy are skeptical that the billions in EU aid will be allocated in a just way.

That skepticism is anything but unfounded as billions of euros in the past have already trickled away in the south without any tangible economic effect. So, how is somebody from the Apulia region going to invest the money in a meaningful way, many ask, say, in Milan, the country’s finance hub.

Economic professor Roberto Perotti of Bocconi University in Milan wouldn’t go as far as to say that Conte can’t do it right, but he also paints a dim picture. “There’s an enormous risk that we are incapable of spending the aid money or that we’ll just squander it away,” he told Reuters last September. “If this is the case, we’ll be heading toward another financial crisis.”

Financial disaster looming

This is because in such a scenario, international investors would again start focusing on Italy’s horrendous foreign debt, opening the gate for financial market speculators.

Because of its omnipresent red tape, Italy has not been in a position to actually use more than half of the funds for various projects supported by Brussels. Administrative offices in the south in particular seem unable to hand in project applications that comply with EU standards or implement approved projects.

Luca Bianchi of the private SVIMEZ research institute in Rome has been dealing with the south’s structural problems for many years. In an interview with the Welt am Sonntag newspaper, he said that in the regions south of Latium, some 2% of GDP was lost in 2019 because of inefficient administrators between Naples and Palermo where already granted resources from the European Structural and Investment Funds were not collected in time.

A look at European Commission stats doesn’t bode too well for Italy rising to the challenge of modernization this time around. Between 2014 and 2020, only 40% of all EU-backed, project-based funds for the country were actually spent, making it a clear underperformer among EU member countries.

High-tech olive presses and subsidies for heating systems

Italy’s Next Generation projects range from hydrogen-powered vehicles to olive presses and infrastructure improvements in the Mezzogiorno region in the poor south of the country. There are incentives for buying cars, be they with combustion engines or electric. Real estate owners get some money back from the state for installing modern heating systems.

It doesn’t get much better with the latest round of plans by the Conte-led government, says Friedrich Heinemann. “What I’ve been reading so far doesn’t really make me optimistic,” he told DW. “It’s been known for a long time what the real bottlenecks are in Italy. There’s an education system that doesn’t really prepare the young for a modern and digital work environment, and that’s also harming companies as they lose their international competitiveness,” the ZEW researcher added. “The labor market is overregulated.”

“The public sector is oversized, and staff keeps getting recruited on the basis of connections rather than actual performance,” Heinemann argued.

Real problems are suppressed collectively

Add to this the southern region’s complete dependence on fund transfers from Rome and rising corruption there. There’s nothing in the Conte plans that would tackle those shortcomings, according to Heinemann.

“An EU-financed solar panel on some roof in Italy makes for nice pictures and may thrill some European officials, but such a roof will not stop the economic downturn of the country in any way,” Heinemann quipped. “Basically, what we’re seeing is a nation that’s been suppressing the real problems collectively.”

He added it was a mistake not to make the billions in aid contingent on concrete reforms. “If no corrections are made, the EU’s post-coronavirus aid package for Italy and other nations could eventually achieve the opposite of what it is meant for,” the Mannheim-based economist warned.

“There’s simply not enough reform pressure in the recipient countries. Instead of tackling unpopular, but nevertheless crucial reforms, public administration is set to grow even further, and ample EU subsidies suggest that painful cuts are not really required.”

As Italy plunges into chaos, how will EU recovery funds eventually be used? The British Journal Editors and Wire Services/ Deutsche Welle.

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