How The Recovery Fund Can Change Italy

For the recovery fund to have an impact, Italy will have to ensure that this European money is invested in value creating activities, and not put to waste. This requires strict criteria and the use of evidence-based methods.

Recovery Fund Giuseppe Conte European Council 2020
Governo / CC BY-SA

For the recovery fund to have an impact, Italy will have to ensure that this European money is invested in value creating activities, and not put to waste. This requires strict criteria and the use of evidence-based methods.

On July 21, after a gruelling European Council that left vast quantities of blood on the floor, the EU and its 27 members took the unprecedented step of approving an €1.8 trillion-plus 7-year budget, with a €750 billion recovery fund.

From any perspective, this is a most unprecedented measure enacted by an extraordinary international organization. The passing of the recovery fund, indeed, shows two things: first, that the European Union can act decisively to mobilize large amounts of funding in times of crisis; second, it still manages to have the national governments reach a consensus.

The fact that France, Italy, Spain and others member states managed to push the recovery fund to consist mainly of grants rather than loans, is an achievement in itself. If we are to remember earlier weeks, the original proposition of grants through the issuance of joint debt was unimaginable, and the first calls received a flat-out “no” from many capitals.

Indeed Mark Rutte, the prime minister of the Netherlands, a leading member of the so-called coalition of the ‘frugal’ countries (officially including the Netherlands, Denmark, Austria and Sweden, and now unofficially Finland), measly suggested an aid package entirely based on loans. There are not too many issues with loans by themselves, even though they then have to be repaid with interests — they are surely a welcome part of the solution. However, the unprecedented economic aftermath of this COVID-19 crisis will require an ambitious response and the use of all measures that are available, including raising new forms of debt, to give the European economy a chance to slumber into and survive the 2020s decade.

Having managed to keep the grants on the table surely represents a victory for the ‘non-frugal’ countries, consisting of Italy and the others. An additional success has been keeping Germany on-side during this whole negotiation process, as it seems ready to shed some of its fiscal orthodoxies and previous vetoes towards enhanced forms of European solidarity and joint-financing. Even though the balance between loans and grants has decisively been mitigated in the direction of the frugals’ preferences, with the final amount of grants being €390 billion as opposed to the €500 billion some might have wished for, many European diplomats now have a reason to celebrate. This is a defeat in some respects for those who felt that a strong EU response required it to employ all its potential firepower to fight the pandemic and provide the EU institutions with their finest hour.

This is no finest hour. However, victories need to be taken in perspective, and some financing is better than no-financing, and an agreement is better than no agreement at all. From our national perspective at least, Giuseppe Conte can come back with a tangible outcome. Indeed, Italy will be the greatest beneficiary in terms of both grants and loans. Even though, there is a complex governance clause in the recovery fund, which allows Member States to challenge how the recovery fund’s investment is being used by recipients, it would require a qualified majority of Member States to have these investments blocked and so there are relatively fewer risks that Italy might be prevented from employing these funds, provided that they are genuinely not being misused.

However, it would be extremely complacent for Italian elites to be too cheerful. The funds will only start trickling down next year, so Italians will have to face hard choices come October, and potentially a very difficult winter.

For the recovery fund to have an impact, Italy will have to learn how to ensure that this European money is invested in value creating activities, and not put to waste — something for which Italy does not have the best track record, both in terms of EU money or its own money. This would require a radical reform of the governance mechanisms and potentially epochal administrative reforms, allocating competencies efficiently between different authorities, and adopting careful selection criteria for the investments with the use of evidence-based methods.

Assuming Italy were to be successful in using these funds, the €209 billion it will receive will not solve Italy’s economic woes. In fact, it will not be enough to kick-start the economy, but only to alleviate some of the pain. Indeed, while Germany will be taking a much more modest sum of the EU funds, it will be mobilizing an amount that is larger than the whole EU recovery fund to aid its industries. In an ideal world, Italy would have to mobilize a comparable sum to have a similar effect in protecting the economy — but it can’t.

Even though there is currently no end of the tunnel in sight, any meaningful recovery from the crisis will not take place without a national strategy focusing on helping strategic sectors weather the crisis, but also in laying the foundations for solid economic growth afterwards. In this respect, Italy will not only have to do some serious soul-searching as regards to its economic and policy failures compared to other EU States, but also develop a growth strategy that will future-proof its economy.

It should look at cutting waste in the public administration without affecting public services’ quality, investing in potential growth areas such as the circular economy and reviewing the barriers that keep Italian SMEs underperforming. It must fundamentally also invest more in the educational system and digital infrastructure in order to support value-intensive activities. More importantly, it must help the €3 trillion that are hoarded in savings by Italian citizens, and companies make their way into the real economy. This will require a strong political consensus that will be difficult to achieve, especially in Italy. Not that building an optimistic post-Covid vision will not be a monumental task for any country in Europe, if not the world, it just happens to be that it will be particularly hard for us.

The EU might still play a role in helping give Europe a life after Covid. While it is regrettable that some countries might have pursued narrower ‘perceived’ natural interests at the expense of the greater European common good and their ultimate self-interest, this recovery fund should be used as an opportunity to explain that this form of financial intervention not only is not a fiscal transfer from the North to the South, as is often portrayed, but through the creation of EU-backed debt, the frugals themselves will have access to additional funds that they would not have been able to benefit from without the existence of a recovery fund.

In other words, the recovery fund should be seen as a win-win for all member states. Unfortunately, the same cannot be said for the climate, with funding for the ‘green new deal’ being one of the victims of the — pardon the pun — frugals’ frugality. I am not certain this is a particularly proud time for the ruling Austrian or Finnish green parties. Nor are the cuts to healthcare in the EU’s budget very illustrative of what the Finnish, Danish or Swedish social democrats in government might have thought of a ‘Social Europe’. If anything, this recovery fund highlighted the limitations of ‘progressives’ in helping shape Europe for the better when given the chance, and this should be called out.

Moreover, what also needs to be called out for, is the fact that no successful or fair economic recovery will be possible in Europe as long as some Member States continue to act like Caribbean islands that offer corporate tax sweet deals to multinationals and siphon other Member States of the tax income that is owed to them. To be fair, not all of the frugal nations are guilty of this, and some of the non-frugal countries such as Ireland and Luxembourg are also implicated in this type of behavior. Any fair recovery in the EU should be based on tax justice as well as environmental and social justice. More importantly, the recovery fund is right to raise the issue of ‘governance’ in the disbursement of loans and grants. It should however make more of an effort of putting the issue of democracy on the table. Why the ministers of the frugals and non-frugal countries and their electorates have not been more vociferous about potentially funding quasi-dictatorships with EU funding, will remain a mystery.

In any case, this will not be the last occasion in which EU member states will be in profound disagreement on how they see their future together. This recovery fund, sure, is still a first step in the right direction when facing the immediate Covid crisis. Even though prime minister Rutte put up a hard-nosed fight, it might still be better to provide concessions to him today, if this might help him continue to be prime minister next year and carry-on the conversation, as opposed to someone backed by Eurosceptic forces such as Geert Wilders or Thierry Baudet’s parties. In the long-term both Italy and other Member States will have to look at their dysfunctions and inconsistencies and develop a shared vision of a future which is sustainable, and ultimately fair on the citizens of all EU Member States.

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