Italy’s recovery funds saga a test for EU fiscal integration

The ongoing revision of Italy’s pandemic recovery plan, which triggered confrontation with municipalities, has implications for the country’s internal politics, economy and the EU approach to fiscal integration.

Italy is the largest recipient of the Recovery and Resilience Facility (RRF), the EU’s temporary instrument to help economies recover from the COVID-19 pandemic.

So far, Rome has received around €67 billion out of an allocated €191.6 billion and should receive another €19 billion in the third payment. A fourth payment request of €16 billion should be approved by the end of 2023.

Meanwhile, Rome also wants Brussels to green-light a revision of their proposed overall plan.

“We are in the process of assessing Italy’s revised recovery and resilience plan,” a Commission official told EURACTIV, refusing to comment on the expected timeline for the evaluation.

The changes affected 144 measures out of 349 and were proposed to address bottlenecks and delays in the RRF spending but triggered confrontation between the government and municipalities.

Funds diverted

With investments worth €40 billion, local governments are major beneficiaries of the recovery funds. However, they would be directly affected by the revision proposed by the far-right government led by Prime Minister Giorgia Meloni, as it proposes to reduce the amount they would receive. 

Under the revision, €16 billion worth of measures would be deleted, including €13 billion earmarked for municipalities.

The resources saved would be mostly diverted to REPowerEU, the EU plan to reduce dependence on Russian energy, a move that could eventually benefit state-owned energy companies.

To justify the revision, the government pointed at increased investment costs, raw material shortages, possible inadmissibility of projects that started before the recovery plan, and inadequate administrative capacity.

Municipalities worried

According to economist Piero David, political reasons behind the changes also exist.

“The government wanted to finance some of the activities of energy companies and diverted funds from the most politically vulnerable subject,” he told EURACTIV.

“Municipalities do not have an organisation capable of contrasting the government’s decision,” he added.

Following the proposal for a revision, Italian mayors as well as the Natnal Association of Italian Municipalities expressed concerns about projects that could be excluded from the revised recovery plan and remained unsatisfied by the government’s reassurances that they would be financed in other ways.

The European Commission did not respond to EURACTIV’s question whether it shares concerns over the impact that the revision would have on municipalities but said, “We are in regular contact with Italian local authorities.”

‘A serious mistake’

For David, Italy’s proposed revision, which scraps entire measures from the plan, “is a very serious mistake.”

“Other countries proposed more precise revisions on specific projects, but we decided to cut entire measures,” he said, adding that while the revision remains in line with the plan’s objectives, it could cause a fracture between the central government and municipalities.

“The big risk is that while the Commission evaluates the revision, in confusion, municipalities slow down spending and start thinking that the government does not see them as reliable implementation partners.”

The economist also pointed to municipalities’ positive role in ensuring capillarity in redistributing resources throughout the Italian territory, which also helped raise awareness of the plan among the population. The same positive role was highlighted in the Italian Court of Auditors’ report on the recovery plan published in March.

Failure is a no-go for Brussels…

Despite the municipalities’ opposition, Rome is confident that the revision will receive the EU’s green light.

Many in Brussels hope for a success for Italy’s plan, as its implementation carries deep implications for the EU fiscal architecture. If it fails, it would contest the EU’s decision to ‘break the rules’ and raise joint debt to help member states recover from the pandemic.

“A quarter of the resources of the recovery fund go to Italy. If Italy’s plan fails, the whole EU recovery plan fails too,” David told EURACTIV.

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This could also erode the future will of ‘frugal’ countries to pool resources or issue EU debt, said economist Sander Tordoir from the Centre for European Reform, who prompted the European Commission to be more open about the RRF pitfalls.

“The Commission and member-states have neglected to build genuine consensus beforehand on what would constitute big-picture political success for the RRF,” he told EURACTIV, warning of a backlash.

“Without a more honest debate about what is and isn’t working in the recovery fund, inevitable newspaper headlines of some failed or wasted projects may overshadow an important overall contribution of the fund to the EU economy, cohesion and green transition,” he said.

…and Italy

At the same time, many see the recovery funds as a lifeline for the Italian economy.

On 3 September, Economy Commissioner Paolo Gentiloni said that while Italy is progressing on the recovery plan, the “attention [given to it] is not up to the task, and Italy cannot afford this.”

“Perhaps it is not yet clear that this is the lifetime opportunity for a generation,” he said.

Additional reporting by Simone Cantarini and János Allenbach-Ammann.

[Edited by János Allenbach-Ammann/Alice Taylor]

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