In response to the economic crisis caused by the Covid-19 pandemic, the EU deployed its ‘Recovery Plan’ programme, “the largest stimulus package ever financed in Europe”. Of the €1.8 trillion total, Italy, the first and economically hardest hit country in Europe, will receive the largest share with €260 billion.
The daunting task of overseeing the spending and policy objectives of the Recovery Plan will fall on Italy’s new Prime Minister Mario Draghi. Portrayed by the press as the anointed savior, Draghi, former ECB boss, is faced with an 8.9% fall in GDP and soaring unemployment. Recently, Draghi’s cabinet released the two-hundred-page long plan which sets out Italy’s spending priorities, proposed policies and accompanying reforms. This plan, called the ‘PNRR’, national plan of recovery and resilience, is a once in a lifetime opportunity to revive Italy’s long-standing socio-economic malaise. It is unlikely to be effective.
The PNRR, with its fastidiously complex acronym, does not bode well for Italy’s prospects. The plan is divided into six main ‘missions’: technological innovation, green economy, infrastructure, education and research, social inclusion and health. Inspired by Draghi’s ‘good debt’ mantra in recent interviews – healthy government spending that yields growth in the long run – and underpinned by a framework of common European solidarity, the ambition exceeds its execution.
While the PNRR undoubtedly has potential and is positive in many ways, namely targeted investments in essential infrastructure, improvement of school curriculums and research initiatives, and some red tape slashing among others, its greatest shortcoming is the structural reforms, or sufficient lack thereof. The reforms outlined in the plan attempt to tackle the core areas of inefficiency in the justice system and civil service, as well as reducing complexity for public and private tendering procedures.
The problem is twofold: the proposed reforms do not go far enough for them to be sufficiently effective and certain key structural areas, such as taxation, labour market rigidities and constitutionally-born flaws of the justice system, are left almost completely untouched.
Tax evasion, for instance, is a huge problem in Italy. High evasion rates are in large part a consequence of the high tax burden, with a tax bracket of 43% for personal income earnings above €75k. As taxation stifles growth, labour market rigidities, like the power of trade unions, excessive regulation, complexity in hiring and firing, constitute major “access barriers to the market”, especially in regulated professions, resulting in “a negative impact on investments and productivity”.
Furthermore, the proposed reforms for the justice system, aimed at cutting civil trial times, digitising court documents, and encouraging Alternative Dispute Resolution Mechanisms, fail to address intrinsic constitutional flaws. Issues such as the separation of careers between prosecutors and magistrates, severe unaccountability of judges, and a broken appeals system are all essential aspects that obstruct the proper delivery of justice as a whole. Consequently, this leads to a hostile business environment that discourages foreign and domestic investors as legal certainty is often legal probability.
Reforms to introduce tax cuts, jail time for serious tax evasion, labour market deregulation, and a principle-based approach to justice system streamlining and fairness are all essential to allow EU funds to find fertile ground. Otherwise, this plan risks merely dumping money on a broken – or only partially-mended – system, with much of it foreseeably seeping through the rusty cracks due to organised crime, corruption or simple inefficiencies.
This misguided approach also potentially hinders the PNRR’s effectiveness in the long-run. The plan intends to address deep-rooted complexities with the pre-conceived Keynesian notion that government spending can solve everything. Italy, however, ranks 58th in the World Bank’s ease of doing business statistics, with exceptionally low private investment and a savings-dominated economy. Moreover, to find ‘Italy’ in the economic freedom index, you must look all the way down to the 68th position. Less, rather than more, government appears to be the cure.
As Draghi himself acknowledges in the preface to the PNRR: “one of the factors that limits Italy’s potential for growth is the relative slowness in the implementation of structural reforms”. Yet his attempt, while laudable given the challenging conditions, is shy of what Italy needs. This gap – how big or small only time will tell – may prove to be a huge missed opportunity.
Ultimately, the Recovery Plan programme is a monumental European effort to chart a common course of economic growth for the future. Italy’s plan lacks sufficient, far-reaching reforms to effectively step up to the occasion.
Italy has surprised us in the past, and its exceptional potential for resilience and creative ingenuity may, yet again, shine through. In the year dedicated to Dante Alighieri’s memory one can only hope that Italy, emerging from the depths, may “come forth to rebehold the stars”.
Tommaso is currently undertaking work experience at Bright Blue. Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Image: World Economic Forum]
