The European Union’s attempt to put together a joint fiscal response to the Covid-19 recession is being held up by a pair of troublemakers. Hungary and Poland are resisting efforts to link the disbursement of emergency funds to a commitment to the rule of law, which they see as an undue intrusion in their domestic affairs.
But even if Brussels manages to reach a compromise on this political matter, a profound financial question about its 750 billion-euro ($900 billion) “Next Generation EU” package would reemerge: How can you make sure recipient nations spend it properly?
Italy, for example, is struggling to put together a coherent plan on how it will use its share of the available grants and loans, and there’s a risk that much of it will be frittered away on wasteful projects. The so-called “frugal countries,” including the Netherlands and Austria, resisted the creation of this joint fiscal tool. They could soon feel vindicated.
The EU took a leap of faith in proposing the recovery fund. In principle, the European Commission has to ensure that governments will channel the funds toward projects that serve priorities such as improving productivity and fighting climate change. In practice, Brussels will struggle to deprive member states of their allocated quotas if they use it differently, since national politicians will simply squeal that “eurocrats” are starving their people. The Commission can try to exert pressure, but it will have to hope that individual governments do the right thing.
Italy is already proving how this process can go wrong. The coalition government partners, the populist Five Star Movement and the Democrats, can’t agree who should be in charge of allocating the money. Italy is set to receive 209 billion euros in grants and loans from the EU, and both parties see the funds as an unprecedented opportunity to consolidate their power bases in the country by showering money on the right places.
To try to manage the competing interests, the government is looking at creating a task force of up to 300 officials that cuts across several ministries. Unfortunately, Italy’s bureaucracy isn’t always a beacon of efficiency so there’s a real risk of mismanagement.
The EU isn’t helping much. The rule of law dispute is pushing back the disbursement of the first round of funds until at least the summer. This delay risks weakening the recovery from the pandemic shock and compounding its permanent damage, as more viable companies go out of business and more unemployed people lose their skills or become discouraged. However, the national pandemic recovery plans aren’t due to be submitted to Brussels until the spring, so there’s time for Italy to make up lost ground.
The trouble is that Rome appears to have lost any sense of purpose or direction. Roberto Gualtieri, Italy’s finance minister, is busy firefighting the economic crisis, as he unveils a succession of emergency packages to help those affected by new lockdowns.
Looking beyond the immediate crisis, the government’s priorities aren’t clear for boosting the economy in the long run. Prime Minister Giuseppe Conte appears to be drifting, as demonstrated by his declining popularity.
For now, the EU is shielding Italy from trouble. The European Central Bank has skewed its asset purchases to favor Italian government bonds, helping push the nation’s yields to record lows. Brussels has suspended its fiscal rules for this year and next, allowing Italy to run a budget deficit above 10% of gross domestic product. Germany and France appear determined to ensure that the 750 billion-euro pandemic fund will materialize, regardless of Hungary’s and Poland’s opposition.
Italy cannot assume this attitude will last forever. And yet, we’ve seen a number of senior politicians, including Riccardo Fraccaro, the Five Star cabinet undersecretary, and David Sassoli, the Democrat president of the European Parliament, float the idea that debts incurred during the pandemic should be forgiven. Several ECB officials have responded that even canceling some of the central bank’s holdings of sovereign debt would be against the European Treaties, which prohibit it from monetizing deficits.
For years, Italy has demanded solidarity from its neighbors. The pandemic fund is a tangible response to these calls, at a time of acute need. Rome now needs to show it can spend the money effectively. At stake is more than its own credibility, it’s the future of the EU.
Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion.
Source: Bloomberg
