May 19, 2021

Europe

ITALY: From Super Mario to Mario?

BY Wolfango Piccoli

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Report Contents

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( 7 mins)
  • After a little more than three months in office, Prime Minister Mario Draghi has still not made his mark.
  • There has been no discernible departure from the previous government in key policy areas, like the management of the pandemic and the economy.
  • The implausible coalition backing the government is likely to become even more fractious in the months ahead, possibly putting at risk Draghi’s still-to-be unveiled reforms.

Mario, the big spender

The government will approve a new stimulus package (worth around EUR 40bn) by the end of this week. This will push Italy’s expected deficit to around 12% of GDP and public debt to 160% of GDP in 2021. Recall that a previous support package worth EUR 32bn was approved in March. Just like in previous packages, the new funds will be spread across a multitude of schemes, initiatives, and beneficiaries to meet the requests put forward by the political parties backing the government.

Around EUR 18bn will be used to provide grants to businesses (including freelancers) whose turnover suffered (at least by 30%) due to the pandemic. On the labor front, the decree provides fresh resources to finance various existing support measures, including temporary allowances for self-employed workers and seasonal workers in sectors like tourism, sports, culture, and agriculture. The so-called emergency income will also be extended for another two months. Tax incentives will be offered to businesses that will not dismiss furloughed workers who once the ban of layoffs expires on 30 June (extended to 31 October for employers eligible for the “in deroga” wage supplementation, ordinary allowance and “agricultural” redundancy fund) and for firms that hire new personnel with open-ended contracts. The overall labor envelope is expected to be worth around EUR 5bn.

Another EUR 8bn will be used to replenish the coffers of local administrations (regional and municipal). It is estimated that around 1,400 city councils are currently at risk of default. A scheme will also be launched to help first-time home buyers (under the age of 36) by cutting the related tax burden and administrative costs. A variety of tax payments are also expected to be further postponed, while bankrupt airline Alitalia is likely to receive another cash injection.

More state rather than less

Meanwhile, state intervention continues to be preferred formula to rescue troubled businesses, just like done by previous governments. Rome is considering extending to mid-2022 tax breaks for corporate mergers – a key plank of an incentive package that the former government had prepared to convince UniCredit to take on loss-making Monte dei Paschi. Similarly, taxpayers’ money will be used to fund ITA, the new Italian carrier that is expected to replace cash-strapped Alitalia. State-lender Cassa Depositi e Prestiti is set to make a majority stake in Autostrade.

Vaccination program: improved but targets missed

Despite recent improvements, Italy — one of the countries hit hardest by the pandemic — is still lagging behind in administering vaccines. The much-publicized target of 500k jabs per day has never been consistently reached; the current weekly average is around 480k shots per day. Due to the wrong design of the rollout by the previous government (only partially addressed by Draghi), less than 50% of those above the age of 70 are fully vaccinated. This failure to properly vaccinate the elderly helps explain why Italy had a higher death rate (the seven-day rolling average of daily Covid-19 deaths is 174) in recent months compared with its neighboring countries. As of 19 May, 15.3% of the total population is fully vaccinated while another 17.4% is waiting for the second dose.

While Italy now has fewer active Covid-19 cases than it did at the start of its third wave (315k on 18 May vs 382k on 19 February with a peak of 573k on 28 March), it will be critical to keep the vaccinations high to outpace possible contagion caused by the reopening of the economy. Earlier this week, the government approved a decree pushing back a nightly curfew to 11pm from 10pm (and abolishing it altogether from 21 June) and easing other curbs in the regions where infections are low. As part of an effort to boost summer tourism, Rome has recently scrapped mandatory quarantine for visitors from the EU, Britain and Israel who test negative for Covid-19.

Implausible coalition set to become even more implausible

On the political front, policy-making is likely to become more complicated in the weeks and months ahead as the precarious balance between the coalition parties will be severely tested. This as Draghi is set to tackle the most difficult part of his agenda: reforming an irreformable country. Despite Draghi’s announced sweeping reform plans, the reality is that three months after taking office not much progress has been achieved on this front. While some reforms (reducing red tape and revising the hiring of public servants) are in the pipeline, there is still no consensus on them within the coalition and, more crucially, there is not a tangible reform momentum.

In the short term, a new refugee crisis could upend all of Draghi’s fine plans, forcing him to focus on this refugee crisis rather than on much-needed reforms. The numbers of migrants arriving in Italy from North Africa since the beginning of 2021 has almost tripled compared to the same period last year. A migration surge has the potential to raise intra-coalition tensions given the different positions on the matter held by the Democratic Party (PD) and the Lega.

President Sergio Mattarella said earlier today that he is looking forward to retiring once his mandates ends in early 2022. The election of the next president could affect the already weak cohesion of the ruling coalition. Matteo Salvini has repeatedly expressed his support for Mario Draghi to move to the presidential palace – a development that would allow him to elegantly sideline the former ECB president and most likely trigger early general elections next spring.

As for the now, all the main parties backing Draghi’s government are in a difficult position. Despite the change in leadership, the PD remains without a policy agenda, and it has not still reconciled itself with the fact that it is now in government with Euro-sceptic adversaries from the right, like the Lega.

The Five Star Movement (M5S), in turn, is firmly on a declining path (possibly terminal), torn by an acute identity crisis and without a leader since 2019. Intra-M5S tensions could undermine the attempt by former Prime Minister Giuseppe Conte to transform the party into a center-left, green force. For now, the process to anoint Conte as leader has been blocked by the decision to part ways with the pioneering online voting platform, known as Rousseau. Due to this acrimonious divorce, the M5S does not currently have the means to poll its members, leaving it rudderless.

As for Matteo Salvini, he is locked in a fierce contest with Georgia Meloni for supremacy of the right wing that has intensified since the Lega joined Draghi’s government, leaving Brothers of Italy (FdI) practically alone in opposition. From pulling 34% of the vote in the 2019 European elections the Lega currently stands at around 21-22% in the polls. The Lega’s decline in the polls has largely coincided with FdI’s meteoric rise. Meloni’s refusal to follow the Lega and Forza Italia when they joined the broad alliance backing Draghi’s executive means that she stands out as de facto leader of the opposition. This has bolstered her image as a principled politician unwilling to compromise her conservative ideals and allows her to maintain a distinctive position.

Current polling trends suggest the Lega will be overtaken in the coming months by the far-right FdI, whose popularity is now at around 18-19%. Under pressure, Salvini will continue to keep one foot in and one foot out of government on multiple fronts, alienating the coalition allies and complicating Draghi’s job. In early August, a so-called “white semester” will begin: the last six months of the Italian president’s term in office, during which parliament cannot be dissolved. While this guarantees that there will not be elections at least until the spring of 2022, it could also make it harder to maintain discipline within the ruling coalition.

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