Italy was undoubtedly the European nation most affected by Covid-19, from an economic point of view and number of deaths. According to many people, the Italian Government was a bit unprepared in managing the emergency and the economic consequences negatively affected the already precarious state of Public Finance. Looking at the Revenues side, the monthly data are obviously worrying due to the unique situation, especially if compared to the past crisis (-80%/90% only in April).
In terms of GDP, the first quarter has already recorded a -4.7% and this drop should be even more pronounced in the second quarter; concerning the end-of-year projections, there are more or less pessimistic estimates (10-20%) in line also with the European forecast (-16% of GDP in case of “COVID second wave”). In this situation, the potential recovery (second half of 2020) will, however, be strongly affected by many legislative and psychological limitations for some key sectors (such as tourism) and by the strong dependence of the Italian manufacturing industry on other industries (e.g. automotive).
The decrees approved by the Italian Government (“Cura Italia” and “Rilancio Italia”), concern the main strategic sectors/categories and are focused on some instruments (tax credits, depreciation / super-amortization, tax relief, capitalization, public guarantees, redundancy fund and social safety nets) not always in line with the businesses and professionals’ needs. In addition, the main impression is that these measures have been adopted too late, despite the higher flexibility granted on European parameters. At this stage, the Italian system needs cash immediately, in order to boost demand and production; unfortunately, the Italian Government couldn’t support immediately local companies and professionals with cash injections (in other countries the situation was different and many layoffs were avoided).
Since this is the biggest crisis after the Second World War, a decisive intervention by the European Union is strongly necessary. The EU Commission proposal on Recovery Fund comes from an initial agreement between Germany and France; this initiative will be covered by the European Union budget and will support the regions and sectors most affected by the pandemic crisis. The “Next Generation EU” plan (€ 750bn plan) was presented by the European Commission on May 27: it will strengthen the EU Multiannual Financial Framework 2021-2017 (€ 1,100bn billion).
The total budget 2021-2027 will, therefore, reach € 1,850bn in addition to the measures already approved on temporary Support to mitigate Unemployment Risks in an Emergency (SURE: € 100bn), BEI (€ 200bn) and MES (€ 240bn), for a total of € 540bn. The mainline of “Next Generation EU” fund is represented by the € 560bn “Recovery and Resilience Facility” (€ 310bn for transfers and € 250bn for loans) set up to support (without conditionality) investments and resources for long-term recovery (with a specific focus on Green Economy, Digitization and other important sectors affected by the pandemic crisis).
The Member States will be responsible for preparing national recovery and resilience plans that will be approved by the EU Commission; the release of the funds will, therefore, take place gradually according to the project’s progress. In addition, the EU Commission also proposed the amendment of 2014-2020 Financial Framework by integrating it with € 11.5bn (“React-Eu”) which will be useful to cope with the emergency as early as 2020. The next step is to achieve an agreement on the “Next Generation EU” fund and on the 2021-2027 Financial Framework, in the next European Council (July).
In detail, the “Next Generation EU” fund of € 750bn (€ 500bn for transfers and € 250bn for loans) will be collected through the issue of European Commission bonds (purchasable also by the European Central Bank) guaranteed and repaid by European Union budget (EU Commission will temporarily raise its own resources up to 2% of GDP). The distribution of funds to the Member States (~€ 170bn for Italy, of which € 90bn loans) will be made according to the needs of the States affected by the pandemic crisis and not based on rigid parameters (e.g. GDP). Each Member State will contribute to the funds’ repayment in the next years, according to its percentage of contribution to the European Budget.
The good news is that the bonds are guaranteed by the EU Commission’s Budget, that funds are distributed according to post Covid19 needs and that the initial proposal comes from the two EU pillars (Germany and France). As anticipated, it will be possible to reduce taxes and offer subsidies to sectors such as Health and Research (e.g. enhancement of prevention plans), Environment (e.g. fighting climate change), Business Digitalization and synergies between European companies. The loans will be covered by the issue of EU Commission bonds (maximum thirty years term) and the repayment will take place in the period 2028-2058. The hypothesis of issuing “perpetual bonds” (only interest is paid) has been rejected. Nonetheless, many economists agreed that these solutions, in combination with other measures already approved (“light” MES, EIB, SURE) may not be sufficient to completely help the Italian compromised situation. In other continents and countries, higher funds have been immediately allocated to support the economic system.
After the initial proposal from France and Germany, Northern European countries did their counter-proposals (including only loans) with more strict terms on repayment (shorter terms) and on necessary reforms to be carried out. After the European Commission meeting on May 27, some of these Northern European countries reiterated that the decision on the “Recovery Fund” should be taken unanimously and that an adequate negotiation period will be necessary. The positions of these countries arise from the lack of trust in Italy, in the loans repayment process and in the appropriate use of funds for the necessary reforms. This is confirmed by the fact that these countries asked, in their counter-proposals, for an involvement of the European Court of Auditors. It’s true that many European funds allocated to Italy have not been properly used in the past, due to the difficulty of attracting adequate investors, to the excessive bureaucracy in accessing funds and to their use in short-term or non-structural initiatives.
It is important to add that the negative consequences of the pandemic crisis on the Italian economy have been accentuated by the already precarious situation of Italy within the European Union. Public spending for long-term investments and the borrowing capacity were limited by the adoption of the Maastricht parameters (3% Deficit/GDP and 60% Debt/GDP). Free movement favoured the big corporations and penalized the small/medium enterprises’ competitiveness (they represent more than 10% of the Italian GDP). The Italian Government covers its expenses through tax collection (in absence of coordinated tax policy at European level) and through the access to capital markets; according to many economists, the loss of monetary sovereignty in favour of the European Central Bank (as well as the spread mechanism, as the difference between the German bonds rates and the Italian ones) contributed to the liquidity and solvency crisis, to a decrease in demand and to the international speculation. International companies usually do not invest in Italy for well-known reasons and sometimes banks are unable to adequately fund to the production system.
In conclusion, the Recovery Fund proposal from France and Germany, presented on 27 May by the EU Commission President Ursula von der Leyen, represents a positive measure. France and Germany are the main two European Union pillars and their agreement represents a first serious and concrete commitment to face the European crisis. These funds should be allocated to the EU countries that have suffered most from this emergency and will be covered by the European Union budget (with the support of a contribution system guaranteed by all the EU states). The hope is that the Recovery Fund will be the first of several EU solidarity instruments, in addition to loans.
by Prof. Paolo Bongarzoni
PhD Vice Dean SSM – ex Corporate Director