If Italy Fails, Then Europe Fails Too

Italy’s parliament has approved Mario Draghi’s 261 billion-euro ($315 billion) spending plan to resurrect the euro zone’s third-largest economy from the ruins of the pandemic. Now comes the hard part: Implementing the tough structural reforms Italy needs to drive growth and rebalance public accounts, and convincing Italians it’s the right path.

Failure to do so would consign Italy to decline and blight the European Union’s plans for further fiscal integration.

Draghi evoked the ghosts of the statesmen of Italy’s postwar reconstruction as he laid out his 273-page spending and reform plan to parliament this week. A comparison with Italy’s ravaged economy after World War II isn’t far-fetched. The country’s gross domestic product shrank 8.9% last year, compared with a 6.2% decline for the EU on average. More than 120,000 Italians have died from Covid-19, the greatest loss of life in the bloc from the virus.

The pandemic also hit Italy’s already dwindling birth rate. There were fewer babies born there last year than at any time since unification. Almost 10% of the population lives in absolute poverty.

What’s more, the virus struck Italy when its economy still hadn’t recovered from the financial crisis, the only EU country to fail to do so. From 1999 to 2019, Italy’s GDP expanded by 7.9%, compared with growth of between 30% and 45% for Germany, France and Spain. Its economic productivity shrank 6.2% between 2001 and 2019, while elsewhere in Europe it grew. Adding to the sense of Italy being locked in the middle of the last century, it has Europe’s lowest representation of women in the workforce, at 53%.

Draghi is right then to give an electric shock to an almost defunct economy with his massive spending spree. Rome is the largest beneficiary of the EU’s 750 billion-euro pandemic recovery fund, and the 261 billion euros he has at his disposal is unprecedented. Still, the task is immense, complex and risky.

The Draghi plan’s pillars are public investment and incentives to get the private sector to invest more too. There are six investment “missions,” including digitalization and the green economy (taking in sustainable transport such as high-speed rail networks). Italy’s depressed south gets 40% of the total core spending. Women are prioritized, as are the young, one in three of whom is unemployed.

But spending is the easiest lever for Draghi to pull. His bigger task is the medium- and long-term plan to reestablish the Italian economy in a way that supports growth. That requires a painful structural reform of justice, public administration, competition and red tape that Italy has been shirking for decades. This will be much harder to achieve than the six investment missions. The reforms will confront the deeply vested interests and dysfunctions such as tax evasion that cripple Italy’s economy.

Already there are signs of political discontent: Lawmakers jeered Draghi this week in the senate when he briefly misread his notes. But for Italy there is no Plan B, nor is there for Europe. If this plan fails in Italy, European fiscal policy fails too. That would provide all the fodder euroskeptic campaigners need to reinvigorate a case they’ve pursued in Germany’s constitutional court to get the EU’s pandemic recovery fund declared illegal.

Paola Subacchi, an economist at Queen Mary University in London, argues that the one-two punch — first spending, then reforms — is “pure Draghi.” She says it recalls the policy debate during the Greek debt crisis when he was president of the European Central Bank. While Germany’s then finance minister Wolfgang Schauble was insisting Greece had to make a structural reform as its economy was going under, the debate in the ECB favoured sequencing. “His position is, you need to support people through the emergency and then do the structural reform,” says Subacchi. “But the reforms are the overarching thing.”

Unfortunately, Italy is on an exceptionally narrow path to economic reinvention and Draghi’s time is limited. Spending can’t be decoupled from reform: Italy has traditionally struggled to find ways to spend EU funds. He must also navigate between the Scylla and Charybdis of Italy’s historically weak GDP growth and its fiscal position. Italy’s economy should add 3.6 percentage points by the plan’s conclusion in five years time. But that growth needs to sustainable to rebalance Italy’s public accounts over the long term and its eyewatering deficit of 11.8% of GDP and public debt of 160%.

Draghi’s success in becoming the interface between European politics and Italy’s national politics has brought his country breathing room. For Europe he is a guarantor that Rome won’t default on its debt. But, crucially, his plan has a life longer than that of his coalition government. Italy’s current legislature ends in 2023. The plan runs until 2026.

What he really needs to do now is talk to the Italian people, to build consensus around the plan. Here he could again draw on the experience of Italy’s postwar leaders who built its economic miracle on a shared national drive to improve “the common good.” If Draghi’s project isn’t owned by the public, it will never come true.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Rachel Sanderson was Milan correspondent for the Financial Times from 2010 to 2020. She has also written about Italy for the Economist and reported for Reuters and Reuters TV from Rome, Paris and London.

©2021 Bloomberg L.P.

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