Thursday

5th Aug 2021

Opinion

Italy's return to statism spells trouble for the eurozone

  • Italy's Central Bank has warned that 'the insufficient rates of productivity we have accumulated can't be fixed by monetary policy or higher spending' (Photo: Ed Yourdon)

Last week, European leaders clinched a deal ending weeks of deadlock over Hungarian and Polish opposition to "rule of law" conditionality linked to EU spending. As a result, also the EU's €750bn "recovery fund" will be unlocked.

Italy is projected to be the biggest recipient of the fund. It would receive about €200bn, 60 percent of it in cheap loans.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

There are profound questions, however, about whether the windfall of cash will truly help Italy recover or whether it will cause more problems than it solves, for Rome and the rest of the eurozone.

Italy's Central Bank has warned that "the insufficient rates of productivity we have accumulated can't be fixed by monetary policy or higher spending", pointing to the need for genuine reforms to address the stifling bureaucracy and other issues that have dinted Italy's competitiveness.

Draft plans obtained by Italian daily Corriere suggest a rather ideological approach from the leftwing government coalition. As outlined in a document, €74.3bn is earmarked for the "green revolution and ecological transition" and €17.1bn for "gender equality", while hospitals would only receive €9bn, out of the fund originally meant to support countries hit heavily by the health care crisis.

Of course, the main idea of the "recovery fund" is to cope with the economic effects resulting from Covid. In any case, the intended approach seems very much to be one of top-down economic planning.

This accelerates a worrying trend of growing state control over the Italian economy.

Italy, whose inflation-adjusted GDP is shrinking to 1998 levels, was of course never a free-market champion, but the country nevertheless embarked on some considerable privatisation during the 1990s, when former ECB president Mario Draghi was at the helm of the Italian treasury.

In recent years, however, large-scale free market "reform fatigue" has surfaced in the country. Almost 30 years of running primary budget surpluses have proven insufficient to generate growth that would compensate for the massive debt burden stemming from continuous fiscal deficits in the 1970s and 1980s.

In recent years, Rome has changed course and is increasingly pursuing a more statist course.

Matteo Renzi was probably the last Italian leader who made some reform to the country's sclerotic labour market regulations. In 2016, soon after his resignation as prime minister, the Italian government awarded a bailout to Monte dei Paschi di Siena (MPS), the world's oldest bank.

The costly rescue was an early indication of a sharp statist turn, which the "populist" coalition of League and the Five Star Movement also pursued, with increased public spending.

Coalition bailouts

The current coalition meanwhile, composed of the centre-left Democratic Party and again Five Star Movement, is going full steam ahead with more government intervention into the economy.

There is the €3bn bailout for the chronically unprofitable airline carrier Alitalia.

Also, there's the investment by Italian state lender Cassa Depositi e Prestiti (CDP) into the acquisition of Borsa Italiana from LSE Group and – coming up - into the operation of Italy's highways, which currently are privately operated by the Benetton family.

Another highly-troubling example is the Italian government's active intervention in the Italian telecom sector, in a bid to create a single national broadband champion.

To that end, the government has been pushing utility group Enel, a listed company, to sell its 50 percent stake in fast broadband operator OpenFiber, again to state lender CDP, which already owns the other 50 percent of the telecom firm. Enel, which is partly state-owned itself, seems close to folding under the pressure.

This would allow the government's plan to merge one-time monopolist TIM's landline grid with that of its OpenFiber rival to be completed.

As a result, a competitor, Tiscali, has already ceased investment in its own high-speed infrastructure, something which does not bode well for Italian consumers.

This all touches upon the heart of the digital economy, which is where growth and innovation are supposed to happen. The Italian government aims to devote €48.7bn from its recovery fund cash to "digitalisation and innovation", but what is the use, when poor service may no longer be penalised due to lack of competition?

The European Commission has cleared the first part of the operation, arguing that it "cannot be considered a concentration under EU legislation and therefore does not need to be notified under the European Merger Regulation".

However, the question is also whether there is unfair state aid, given the Italian state's outsized role in an activity supposedly reserved for the private sector.

That is because of the significant role of state lender CDP, as well as the fact that the Italian government retains a so-called "Golden Power" in TIM, allowing it to intervene in the company to protect strategic interests.

Perhaps we should give up hope that the European Commission will act as a brake on Italy's move towards more top-down government control over the economy.

The EU's competition commissioner since 2014, Margrethe Vestager—despite her zeal to reinterpret tax advantages to companies as "state aid"—has not done much to stop EU member states from bailing out companies or restricting competition.

She has notably allowed bank bailouts as well as France's nationalisation of a shipyard to prevent it from being bought by an Italian competitor.

There's increasing appetite for state intervention across the globe, but Italy is particularly poorly positioned to afford it. With its monstrous 158 percent to GDP debt burden, it is ultimately dependent on the ECB - and therefore the mercy of other countries.

In the 1980s, before they were privatised, Italy's state-owned enterprises were poorly run and "bastions of inefficiency and privilege", according to Bloomberg journalist Ferdinando Giugliano.

It's not hard to predict how this latest flirtation with statist economic policy will turn out, for Italy and for the eurozone.

Author bio

Pieter Cleppe is a Brussels-based research fellow of the Property Rights Alliance

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

Italy has a responsibility, too

Little wonder the leaders of Austria, Denmark, the Netherlands and Sweden are unwilling to sign off: they're not going to give money so the Italians can fund a tax cut in the middle of an economic crisis.

Italy's 2021 G20 presidency - a transatlantic reset?

The three pillars of Italy's G20 presidency - "people", "planet" and "prosperity" aimed at building a more sustainable future, as well as digital innovation - are shared by Joe Biden, which raises hopes of a positive EU-US dialogue.

Romania most keen to join eurozone

The survey was carried out in seven member states that have not yet adopted the single currency: Bulgaria, the Czech Republic, Croatia, Hungary, Poland, Romania and Sweden. Denmark has decided not to join, having negotiated an opt-out.

News in Brief

  1. EU secures deal with Novavax for potential Covid-19 vaccine
  2. France fined €10m for failing to tackle air pollution
  3. Fire near Athens forces thousands to evacuate
  4. EU to Lebanon: 'deliver results' on Beirut blast probe
  5. Belarus opposition leader demands regime end
  6. Croatia's border-monitoring of migrant rights 'falls short'
  7. Court stops Austria's Afghan deportation, as conflict worsens
  8. 'Missing' Belarus exiles group chief found dead in Kyiv

Column

Burkinis and 'soul caps' - policing Olympic women back in fashion

There are no fixed rules. Anyone can criticise, condone and codify women's apparel. The game is inclusive, bringing together an assorted collection of voyeurs, misogynists, racists, bigots, religious fanatics and culture warriors – but also feminists and other equality campaigners.

Hungary: why we can't support a global minimum tax

This month the OECD Inclusive Framework agreed on the main building blocks of new tax legislation for a global minimum tax and for the digital economy. However, Hungary did not join - this is why.

Stakeholders' Highlights

  1. Nordic Council of MinistersNineteen demands by Nordic young people to save biodiversity
  2. Nordic Council of MinistersSustainable public procurement is an effective way to achieve global goals
  3. Nordic Council of MinistersNordic Council enters into formal relations with European Parliament
  4. Nordic Council of MinistersWomen more active in violent extremist circles than first assumed
  5. Nordic Council of MinistersDigitalisation can help us pick up the green pace
  6. Nordic Council of MinistersCOVID19 is a wake-up call in the fight against antibiotic resistance

Latest News

  1. Italy seeks EU help on migrant boat arrivals
  2. WHO calls for vaccine-booster pause to help poor countries
  3. Romania selling on its jabs, despite low vaccination rates
  4. Cyprus' Varosha is Erdogan's canary in the coalmine
  5. Europe sees drop in Covid-19 cases
  6. Burkinis and 'soul caps' - policing Olympic women back in fashion
  7. Telegram groups lure migrant hopefuls to Lithuania
  8. Third-time lucky for one Syrian grandmother in Denmark

Join EUobserver

Support quality EU news

Join us