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Italy Plays Straight Into the Hands of the Dutch

Italy Plays Straight Into the Hands of the Dutch

Saturday, 11 July, 2020 - 06:15

The European Union’s political leaders will meet next week to negotiate the details of their joint fiscal response to the Covid-19 crisis. The Netherlands has emerged as the main villain opposing the plan, as Prime Minister Mark Rutte demands that countries should implement economic reforms in exchange for any financial help.


Rutte is being too rigid, but supporters of the possible 750 billion-euro ($848 billion) fund aren’t being helped by Italy, which suffered one of the worst outbreaks in Europe. Rome is struggling to come up with a credible plan to put the country back on track. The coalition of the center-left Democratic Party and the populist Five Star Movement is weak and divided, and it only pays lip service to the idea of long-term reforms.


Meanwhile, the country’s far-right opposition, led by Matteo Salvini’s League, does little beyond shouting at the government and at Europe. Italy is playing into the hands of those, such as the Dutch, who doubt European money will be well spent.


The pandemic has hit Italy especially hard. The International Monetary Fund expects its gross domestic product to shrink by nearly 13% this year, more than the euro-zone average. The government has put together a hefty fiscal stimulus, but this will add to the country’s huge public debt. Italy’s 10-year bond yields are now higher than Greece’s — not exactly a sign of confidence from investors.


Giuseppe Conte, Italy’s prime minister, has become very popular during the pandemic, after he enforced one of the toughest lockdowns in Europe. He’s failing, however, to come up with meaningful post-virus policies. He has essentially frozen the economy, barring companies from firing workers and implementing a generous furlough scheme. Yet there’s little sign of what will come next. Last month, he touted the idea of cutting value-added tax, but the coalition partners quickly rebuffed him.


Conte claims that the EU recovery fund offers a once-in-a-generation opportunity to rebuild Italy’s economy, but the Democrats and Five Star are struggling to agree on the spending priorities. The Democrats want to use the funds to boost infrastructure investment. However, Five Star has a history of opposing grand projects on the grounds that they are wasteful and damage the environment. Luigi Di Maio, Italy’s foreign minister — and Five Star’s former leader — has floated the idea of using the European money to pay for income tax cuts. The Democrats quickly knocked back his idea, saying the EU has earmarked the money for investment.


Where the coalition partners did agree, unfortunately, was in propping up ailing businesses that were struggling even before the crisis. The government has given 3 billion euros to Alitalia, a chronically loss-making airline. Banca Monte dei Paschi di Siena SpA and Banca Popolare di Bari SCpa, two troubled lenders, have transferred many of their non-performing loans to a state-backed bad bank. Rome has clashed before with Brussels over this type of state aid, but the pandemic has created a window of opportunity for Italy’s government.


This is a missed opportunity, because there are areas where the EU recovery funds could be put to good use. Italy needs to improve its labor-market policies to offer properly targeted support to workers at risk of unemployment. However, Five Star has stuffed Italy’s labor-market institutions with party loyalists, leading to sub-par results. The citizens’ income program, a flagship Five Star policy aimed at the jobless and the working poor, has failed to find suitable employment for most recipients. Why would a European-funded program administered by the same people yield different results?


Designing a recovery fund that gives governments the right incentives to spend the money wisely is difficult. Despite Rutte’s promptings, the EU needs to avoid the heavy-handed conditions that accompanied past rescue programs. They would be impossible to accept in southern Europe. But a lighter set of conditions means a greater degree of trust in recipient nations. And while Greece and Portugal have managed their economies well in recent years, it’s hard to have the same confidence in Italy.


The rest of the EU members face a dilemma. If they fail to support Rome, they will be accused of failing to show solidarity and they could trigger a market backlash. At the same time, it seems unlikely that any support package will improve the country’s lackluster growth. As Europe’s leaders prepare themselves to discuss a radical overhaul of the monetary union, they must consider whether they’re prepared to support Italy for a long time.


Bloomberg


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