EU could deprive Rome of billions – economy

It’s about 69 billion euros in grants – and important economic policy reforms. After Spain, Italy is the biggest beneficiary of the EU’s Corona aid fund. However, like all states, Italy had to undergo an extensive Reform and investment plan approved by the EU Commission. The authority will only release new tranches if Rome meets intermediate targets. The plan envisages reducing bureaucracy and speeding up the notoriously lengthy court proceedings. By the end of 2026, tens of billions from the Corona fund are to flow into the digitization of administration and industry or into the thermal insulation of buildings. election winner Giorgia Meloni however, has announced that it intends to renegotiate parts of the plan with the Commission. However, the Brussels authorities rule out major changes.

If the right-wing populist and presumably future Prime Minister does not implement Italy’s commitments to the Commission, the EU could withhold subsidies that the government has planned. And this isn’t the only possible economic policy issue looming between Meloni’s alliance and Brussels. The expensive election promises made by the legal alliance would make it more difficult to comply with the Stability and Growth Pact. These sound financial management rules are currently suspended due to the aftermath of the Ukraine war, but the rules could come back into force in 2024.

Lega Nord boss Matteo Salvini, one of Meloni’s allies, knows from personal experience that the pact can cause trouble. He was part of Giuseppe Conte’s government, which fought persistently with the Commission over the right fiscal policy in 2018 and 2019. However, the authority will probably present reform proposals for the stability pact at the end of October. It aims to be simpler, more realistic and more enforceable when it comes back into force. But even an adapted set of rules will require budgetary discipline from Italy. After all, no other euro country apart from Greece is so heavily indebted; the level of debt is about 150 percent of economic performance.

To make matters worse, the European Central Bank (ECB) is raising interest rates in the fight against inflation. This makes it more expensive to take on new debt. The nervousness is already growing on the financial markets: The risk premium between safe German government bonds and Italian government bonds has risen – a first indication that some investors expect bad things for Italy. However, the ECB has launched a new program the transmission protection instrument. This allows the monetary authorities to act against the widening of risk premiums and to buy up large amounts of bonds from vulnerable countries like Italy.

The ECB will only help if Italy follows the rules

Ironically, the ECB is only allowed to do this if the governments who benefit from it keep the stability pact and their promises to reform the Corona aid. This is a strong incentive for Meloni to heed the EU budget rules and reform plan after all. The CSU MEP and economic policy expert Markus Ferber therefore says that the election winner “would be well advised to follow the economic policy course of her predecessor Mario Draghi not to be questioned”.

The ESM euro rescue package also offers important protection against financial and debt crises. The Luxembourg fund can lend money to cash-strapped euro countries if they are having trouble finding buyers for their bonds. A reform is intended to strengthen the role of the ESM, but Italy’s parliament has not ratified the necessary treaty change. After the election victory of the rather Eurosceptic legal alliance, it is unlikely that this step will be made up for. Ironically, the highly indebted Italy could stand in the way of better precautions against new euro crises.

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