eco TV Week

Italy: why the country is once again attracting attention

5/7/2021

The arrival of Mario Draghi as head of the Italian Council in February has sparked renewed attention for the country. The former ECB president seems to have given a clearer political path and will oversee the implementation of the massive €235 billion stimulus package. The latter legitimately raises a lot of hope in the peninsula.

Guillaume DERRIEN

TRANSCRIPT // Italy: why the country is once again attracting attention : May 2021

Since February and the arrival of Mario Draghi as head of the Italian Council, the country has attracted a lot of attention. Three reasons stand out:

1.     The former ECB president has given a clearer and more stable political path

Mario Draghi has managed, in the space of a few days, to form broad coalition government, including  the Five Star Party on the left and Matteo Salvini's Northern League on the right. This coalition has created a clearer political path that is more in tune with the European Commission, at a time when important European deadlines are looming. On the economic front, Mario Draghi has passed two large fiscal stimulus to support the Italian economy in the face of the health crisis, EUR30 billion in March followed by EUR40 billion in April. Italy has also taken the lead in Europe on sensitive issues - such as the retention of vaccines produced in Europe, and most recently on the vaccine passport which will be put in place in the peninsula from mid-May, a month before the European passport.

2.     The national recovery plan legitimately raises a lot of hope

The recovery plan – sent to Brussels on April 31 – is substantial, close to EUR235 bn. The very large envelope of this plan is explained by the fact that, unlike the other large EU countries, Italy is using loans allocated by EU Next Generation Fund, equivalent to EUR123 bn.

This plan would help Italy to bridge a chronic deficit of investment and growth, which are both among the lowest in Europe. A significant increase in investment is necessary to offset the economic impact of the demographic decline, which has accelerated in recent years.

Among the projects listed in this plan, the most significant efforts relate to the creation of high-speed lines connecting the north of Italy to Europe, the development of 5G, tax credits to invest in so-called 4.0 technology, or an eco-bonus to encourage the energy renovation of buildings. One of the major aspects of this recovery plan is that 40% of investments will be concentrated in the Mezzogiorno, in order to close the economic gaps between the north and the south of the country.

3.     The pursuit of a deeper European fiscal union depends in large part on the success of the Italian recovery plan

Italy remains the third largest economic power in Europe and accounts for nearly 15% of the euro area's GDP. It is also the country, along with Spain, which has received the most grants from the Next Generation EU Fund. A failure of the Italian stimulus package would seriously impede the pursuit of deeper fiscal union within the EU.

To be successful, Italy will need to make significant reforms that have received little attention from previous governments. During his inaugural speech on February 17, Mario Draghi notably underlined the efforts that will be made over the coming months to simplify and optimize the tax system, modernize public services and reduce court delays.

Despite the magnitude of the health crisis on the economy, the political context and the economic outlook offered by the stimulus plan offer some renewed optimism for the country. But the hardest part remains to be done.

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