RE:START for Italy - Recovery Plan as Turning Point?

Italy's Prime Minister Draghi wants to put the beleaguered country back on track for growth with an ambitious plan - but doubts remain.
Premierminister Draghi

Premierminister Draghi während einer Rede zu seinem Wiederaufbauplan

© picture alliance / | Roberto Monaldo

Italy has been in crisis mode for years - the huge debt mountain and reform backlog, chronic political instability and, most recently, the Corona virus have taken a heavy toll on the country. Mario Draghi's "national unity" government has pushed through a reconstruction plan to put the country back on track for growth. The roughly 200 billion euros from the EU's Corona aid package will be used for this purpose; an unprecedented sum and unique opportunity to modernize the country. "I guarantee the reforms," Italy's head of government promises. But how substantial are the plans really? We asked expert Carlo Stagnaro from the Istituto Bruno Leoni.

The government's 300-page recovery plan aims to tackle almost all of Italy's long-standing problems at once, from tax reform to market liberalization and administrative modernization. What exactly does it say?

The "National Plan for Reconstruction and Resilience" (PNRR) envisages a series of reforms and investments, divided into six chapters: 1) digitalization, innovation, cultural competitiveness; 2) green revolution and ecological transition (including renewable energies and sustainable agriculture); 3) infrastructure for sustainable mobility; 4) education and research; 5) social inclusion and cohesion; 6) health (renewal of the healthcare system). In general, it can be stated that the plan does not go into great detail on individual investments or reforms, but it does provide a direction. The plan calls for the full use of European funds (191 billion euros in grants and loans and 13 billion euros from the React-EU structural fund), supplemented by about 30 billion euros from a national fund. The plan assumes great confidence in the country's ability to spend the funds fully and efficiently, which is far from self-evident given the experience with European cohesion funds. (Note: Italy actually drew down only about 40 percent of the funds approved by Brussels between 2014 and 2020 because of excessive bureaucracy, unclear delineation of powers between the state and regions, and an inefficient judiciary.) Above all, hopes are high that the massive public spending will revive the economy. In fact, then, the plan is - perhaps inevitably - in line with Keynesian logic: spending to stimulate short-term economic recovery. On the other hand, not all of the planned investments seem to be aimed at increasing potential economic growth in the long term.

How efficient do you evaluate the plan in terms of the goal of sustainable modernization and digital transformation of Italy?

Some of the proposed investments are in line with the intended results: I am thinking, for example, of the promotion of digitalization in small and medium-sized enterprises. Other projects raise doubts: For example, 25 billion will be used to finance investments in the development of the railroad network, especially high-speed trains, but these represent only a small part of freight and passenger transport in the country. In addition, the subsidies cover only part of the investment costs; the financing of ongoing infrastructure and operating costs remains open. In the development plan, it often remains unclear according to which exact criteria the funds were allocated. For example, in the chapter on environmental transformation, significant resources are allocated to some decarbonization technologies (such as renewable hydrogen, biomethane, and photovoltaics), while others are ignored entirely (e.g., biofuels). As for the much-needed reform of public administration, apart from the good intentions, only a few of new appointments are specified. In short, a lot of money is being spent, but not all of it is necessary, and some of it may even lead to costly fallacies.

Can the plan help at all to implement far-reaching structural reforms and revive Italy, which was badly hit by the pandemic, in the long term?

It is difficult to answer this question because there are few details about the structural reforms. However, here are a few examples: On competition, many promises are made, some of which are very positive (e.g., reform of local, public services). Nevertheless, many deadlines for implementation extend well beyond the end of the current legislative term (to 2023). How credible are political commitments over which the current government has no control? The situation is similarly contradictory and superficial with regard to reforms in public administration and the judiciary. An optimist might hope that these simplifications are because the government already has a plan in its pocket that it does not yet want to reveal. A pessimist might fear that, as in the past, the goals will not be achieved and that the agreed fulfillment of the European Commission's recommendations are mere promises.

The coronavirus crisis is changing the socioeconomic landscape across Europe and hitting disadvantaged populations particularly hard. Does the recovery plan take into account plans for a new start that provides opportunities for everyone in society and leaves no one behind?

The pandemic and the foreclosure measures have had a disproportionate impact on women, as women's participation in the labor market is still insufficient. In southern Italy, the employment rate of women is still at a very low level, although women are fighting for more professional equality. This situation may partly depend on factors that can be addressed in the short term, but ultimately structural problems play a role: there is, for example, the lower (though growing) participation of women in STEM subjects and the inefficiency of the childcare network - in a country where family management still rests heavily on the shoulders of women. The PNRR earmarks 17.2 billion euros for programs to bridge societal inequities, such as the advancement of women or young people. But also here, the plan remains vague. The ability of the economy to create opportunities even for population groups that tend to be disadvantaged depends on the ability of the economic system to generate growth and innovation. Measures that have the effect of promoting long-term growth are beneficial to everyone in the population.

Can the reconstruction plan help restore the confidence of European partners and also of the country's own population in Italian politics?

This is probably the most important question. Fundamentally, the "Next Generation" EU program is based on the principle that countries receiving funding must at the same time commit to growth-enhancing reforms. In my view, Italy, which is the biggest beneficiary of the program, should therefore fulfill particularly strict commitments. But will the Commission and the Council have the political strength to withhold financial resources if Italy fails to meet its reform commitments in the future? In theory, yes, but experience shows that this has almost never been the case. It is enough to read the country-specific recommendations, repeated year after year, some of which are actually the heart of the reform section in the recovery plan. Compared to earlier drafts, however, the current version sent to Brussels is a marked improvement, recognizing the central importance of reform and seeking to place planned investments in the context of long-term growth as well as short-term recovery. It is therefore important to review continuously the measures regarding their effectiveness. The crucial question is whether this time words will really be followed by action. I return to the answer I gave earlier: The optimist hopes so, but the pessimist fears the opposite.

Carlo Stagnaro is Head of Research at the Bruno Leoni Institute, an Italian think tank based in Milan and Turin that works to promote a free market and competition culture. The interview was conducted by Rahel Zibner, Project Manager for Spain, Italy and Portugal at the Friedrich-Naumann-Foundation in Madrid.

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