Finance

Italys coronavirus spending bonanza

ROME — With a coronavirus windfall in the pipeline, Italy is drunk on spending plans.

When the EU drew up proposals for a €750 billion fund to help EU members recover from the economic devastation caused by the coronavirus, Italy was allocated the largest share — presenting a golden opportunity for an economy that has barely grown over the last two decades.

Even before the global economic crisis of 2008, Italian governments were straight-jacketed by high public debt and EU-ordered fiscal discipline. Now, thanks to the coronavirus, the EU has relaxed the fiscal rules that pushed Italy to keep its debt and deficit under certain limits. And with a potential funding injection of around €170 billion from the EU fund, some see a chance for Italy to invest in reconstruction, turn the economy around and emerge stronger than before the pandemic.

The Italian government is already sketching out plans for a spending bonanza on infrastructure, energy and other ambitious projects.

Prime Minister Giuseppe Conte told fellow EU leaders during a videoconference last Friday that Italy is drawing up “an investment and reform plan that allows us not to restore the pre-COVID-19 situation but to improve the level of productivity and economic growth.” Contes remarks were an attempt to convince other EU leaders that the money will be used to undertake much-needed reforms, putting an end to the reputation of the eurozones third-largest economy as the sick man of the single currency area.

“To move forward, grow and transform, not to return to four months ago, we need to face these challenges” — Enrico Giovannini, civil society task force statistician

But with negotiations on the proposed fund ongoing, the final amounts for countries not agreed upon, and the so-called Frugal Four — Austria, Denmark, the Netherlands and Sweden — yet to be convinced of its merits, Conte may be getting ahead of himself.

The EU has also yet to agree on how much recovery cash will come via grants and how much in loans. And any plans tied to the EU fund will need to be approved by the bloc before the money is released.

Plus, cynics doubt that Italy, with its deeply rooted structural problems and a weak and divided government, is up to the challenge of turning things around.

Still, the proposed EU intervention is a lifeline for Italy, according to Giovanni Brambilla, CEO of investment fund AComeA. “It is difficult to say this because the pandemic caused so much death and sickness, but the situation is permitting states to make public investments that otherwise would have been difficult to justify,” Brambilla said.

Enrico Giovannini, a statistician who is part of a government-appointed civil society task force that worked on the recovery plan, said it is a chance to tackle Italys structural weaknesses: digital backwardness, low creativity, high taxes and inequality, through reform as well as long-term investments in digital infrastructure and the green economy.

“To move forward, grow and transform, not to return to four months ago, we need to face these challenges,” he said.

Years of hardship

Virtually stagnant even before the financial crisis of 2008, Italys economy was tilting back into recession when the coronavirus hit.

The economy shrank 5.3 percent in the first quarter, with estimates for the full-year slump ranging from 10 percent to 14 percent. Public debt, already one of the highest in the world at 135 percent of GDP, is predicted to rise to 155 percent of GDP this year.

But in marked contrast to the measures that the EU asked of Rome after the 2007-08 and 2010-11 economic crises to keep its public debt under control, Brussels this time responded with apparent largesse, suspending the Stability and Growth Pact (its rules on sound public finances) and waiving restrictions on state aid for businesses

European Commission President Ursula von der Leyens plan was presented as a great victory by the Italian government.

Matteo Renzi, former prime minister and leader of the centrist Italia Viva party, part of the ruling coalition, wrote on Facebook: “EU thrashes populists 750 billion-0.”

Italian politicians are seeking to boost the countrys devastated economy as the coronavirus pandemic seemingly winds down in Europe | Miguel Medina/AFP via Getty Images

Ministers immediately began outlining ambitious spending plans including securing Italys aging infrastructure and public building stock, funding research and training, improving health, digitalizing the justice system and public administration, and improving transport links in the south.

Even long-shelved plans for a bridge between the mainland and Sicily are back on the table. The bridge — first mooted in Roman times — has been revived periodically by politicians and has cost the Italian taxpayer close to €1 billion.

Proposals by the government-appointed task force include simplified tenders for green infrastructure, and the recruitment and training of a new generation of civil servants, said Giovannini.

The success of the recovery plan depends on the quality and type of the projects, said Marcello Signorelli, a professor of economics at the University of Perugia. Small and medium projects distributed around the country are better than large long-term infrastructure projects or tax cuts for boosting growth, and hard-hit sectors like tourism and health should be priorities, he said. “If there is a jump in quality, Italy could go back to a superior level of growth before the 2007-2008 crisis, but if Italy continues to make inadequate choices, the governments problems cannot but continue.”

Some have criticized the proposals put forward by the government as premature and unrealistic. The head of the Confintesa union, Francesco Prudenzano, said Conte had created “a book of dreams” without “the financial resources or political will to make them happen.”

Economists such as Roberto Perotti of the University of Bocconi in Milan have pointed out that the envisaged €170 billion is a mirage of sorts. More than half — around €90 billion — would come in low-interest loans while the rest, in non-repayable grants, would in part be financed by Italy itself, as the third biggest contributor to the EU budget.

Some are unconvinced that this government has the vision, and staying power, to use the windfall effectively.

The real net gain for Italy is estimRead More – Source