Italy: Government crisis could stifle recovery

Rome, Brussels If there is one thing Italy cannot afford at the moment, it is a crippling power vacuum: a nine percent economic slump, national debt rises to one and a half times economic output, companies are unproductive, health and education systems are underfinanced. But Italy’s ex-prime minister Matteo Renzi has now pushed his country into this power vacuum when he left the ruling coalition with his small party Italia Viva.

Prime Minister Giuseppe Conte tries to avoid new elections, speaks to possible new supporters who could secure a majority in the Italian parliament for him. Renzi and his two ministers had terminated the alliance with the Social Democrats and the Five Star Movement on Wednesday evening because they could not agree on the amount and use of the European aid money, which Italy’s economy urgently needs. The payment of the same aid could now be delayed considerably.

There is now also a big question mark behind the next national Corona aid package for companies particularly affected by the pandemic. The companies that were already hard hit would suffer. The companies had hoped for a quick upswing after the sharp slump last year. That could now be strangled by political squabbles. Even the specter of new elections is already haunted, which could bring the country a broad right-wing majority – with the League of former Interior Minister Matteo Salvini as the leader.

“The clock is ticking for Italy,” says Markus Ferber, economic policy spokesman for the EPP group in the European Parliament. The later Rome submits a satisfactory development plan to Brussels, the longer it will take for the funds to arrive in Italy – “those responsible in the Italian government should be aware of this”.

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There is great concern in the EU about the break in the coalition. “Especially in the pandemic it is important that Italy has a government capable of acting,” says the CSU politician.

Debts grow by 22 million euros – per hour

The political crisis hits Italy in an economically extremely fragile phase. The country has still not recovered from the euro crisis in more than ten years. According to estimates by the International Monetary Fund (IMF), Italy’s economic strength will not have reached the pre-crisis level of 2008 even in 2025.

The national debt has stubbornly stayed at around 135 percent of economic output in recent years. None of the governments has managed to get down from the huge mountain of debt, which is now over 2.5 trillion euros.

Then came the pandemic. Debt grows and grows – currently by 22 million euros per hour. As a result of the corona crisis, it will rise to more than 160 percent of gross domestic product, the IMF estimates. Italy would soon be playing in a league with countries like Eritrea and Lebanon. In Europe, only the Greeks exceed this debt level.

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The eighth largest economy in the world was hit particularly hard by Corona. More than 80,000 people have died from or with the virus. In relation to the number of inhabitants, only Belgium has an even higher death rate worldwide. The military vehicles that transported coffins en masse through Lombardy in the spring are etched into the country’s memory forever.

The lockdown that Premier Conte imposed for more than two months in March was one of the toughest in Europe – including a production freeze for most companies. The manufacturing industry has recovered to some extent and is optimistic about the coming months.

Tourism, which normally contributes a good 14 percent to the gross domestic product with its suppliers, almost came to a standstill last year. The industry association Federturismo is assuming a decline in turnover of 80 percent compared to the previous year for hotels alone.

Due to the political quarrels, the payment of what is now the fifth Corona aid package for industries particularly suffering from the pandemic could be delayed. The government wants to adopt a supplementary budget for this, around 24 billion more than previously are planned, including for the procurement of further vaccines. However, experts assume that a resigned government would no longer be able to propose such a large sum to parliament.

The great hope rests on further vaccines

Italy’s economy contracted sharply last year. The latest estimates assume a minus of almost nine percent. For this year, the economists expect from the statistical institute Istat at least a plus of four percent. However, the unemployment rate is also expected to rise, from currently 9.4 to eleven percent.

One of the reasons for this: The cancellation ban imposed by the government at the beginning of the pandemic expires in April. After all, private consumption makes optimistic: While the Italians initially put their money aside during the crisis and drove the savings rate of private households to 19 percent at times, they have been spending more again since September. The tightened corona regulations in winter will primarily affect retailers again.

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The corona vaccinations started at least give hope that the pandemic will end soon. Italy wants to have all its citizens immunized by autumn. This calculation only works if the vaccine candidates from Astra-Zeneca and Johnson & Johnson to be approved in summer. There are many uncertainties, to which the political one is now added.

“The current economic situation in Italy is characterized by the pandemic and uncertainty about the future”, says Jörg Buck, head of the German-Italian Chamber of Commerce in Milan. “What our companies need now is a strategy for the reconstruction plan and its implementation so that Italy and its European partners, especially Germany, can return to growth.”

Italy urgently needs the money from Brussels to tackle decades-old problems: the health system is just as underfunded as education. Business productivity is far too low. The administration works too inefficiently and too analog. Italy ranks at the bottom of the Digital Economy and Society Index, only ahead of Romania, Greece and Bulgaria. Digital signatures are hardly possible, there is a lot of paperwork at the offices.

The judiciary works too slowly, and many processes simply become statute-barred. At the same time, youth unemployment is almost 30 percent.

Renzi flashed a glimmer of hope

“Without national plans, which reforms are to be financed with 200 billion EU funds in Italy, and appropriate controls, no money can flow,” warns Andreas Schieder, head of delegation of the Austrian Social Democrats in the European Parliament.

It is worrying for the entire Union if a country like Italy cannot benefit from the gigantic aid program – “and so falls behind in the reconstruction”. The inadequate productivity rates could not be remedied by European monetary and fiscal policy alone, warns the FDP MEP Moritz Körner.

Renzi let at least one glimmer of hope flash through, despite all the dissent: As soon as the government’s reconstruction plan is voted on, his party Italia Viva would vote in favor. It will soon become clear whether Prime Minister Conte can really still trust his old partner: the use of EU aid will be debated in parliament on Monday.

For decades, Italy has proven that it has always been able to spend EU money despite regular government crises, says MEP Körner. But even if Parliament were to wave through the spending list, there is fear in Italy that Brussels will not be able to pay off in the middle of a vacuum.

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