By Conor Gallagher
The latest uproar in international media about the Meloni government in Italy is over a bill that aims to use less English terms. (Like many languages, Italian has adopted a lot of English words for recent items or fads that emerge from the Anglosphere like “smart working.”)
The proposed law provides a useful distraction for the Meloni government that is overseeing a sinking economy and has accomplished little – especially for a “fascist” government. Meloni and her coalition’s focus on migrants, same-sex couples’ adoptions, raves and English words has proved effective – at least in the polls as Meloni and the Brothers of Italy (Fdl) have risen since coming to power in September.
— Termometro Politico (@TermometroPol) March 14, 2023
Meanwhile, for the Italian economy, which has been surprisingly resilient following the war in Ukraine and the loss of Russian energy, there are dark clouds on the horizon – some of which are beyond the government’s control, but others are self-inflicted wounds.
Europe’s second largest industrial base is looking at a sustained slowdown – or worse. The Italian economy shrank 0.1 percent in the fourth quarter of 2022. According to Eurostat, the country’s employment rate stands at 60.1 percent, which is now dead last in the EU after being overtaken by Greece.
Italian economy minister Giancarlo Giorgetti maintains that all is well and that the country might even upgrade its 2023 forecast for economic growth from 0.6 percent to 1 percent, but the headwinds tell a different story.
Here are some of the factors that are beginning to drive the Italian economy into the mud:
- European Central Bank rate hikes.
- Higher energy costs.
- Meloni and company got rid of two programs that effectively provided a stimulus for the economy: a meager basic income and the Superbonus, which encouraged renovations of buildings and was credited with generating hundreds of thousands of jobs.
- Italy is now at risk of losing billions in EU recovery funds.
The EU Recovery Funds
The European Commission recently froze a 19 billion euro installment for Italy, and asked for clarification on Rome’s efforts to meet the conditions linked to the money. The cash is part of the EU’s post-pandemic recovery funds, of which 200 billion euros was earmarked for Rome in the form of grants and cheap loans through 2026, making it the largest beneficiary in the bloc.
Meloni says she’s not worried, but Rome is falling behind on “reforms” agreed with Brussels in return for the cash and is also struggling to spend the money it already received. Some in Meloni’s coalition are even saying they don’t want the money even though it would likely lower growth prospects and hit the country’s credit rating.
According to Il Fatto Quotidiano, the lack of Rome-Brussels alignment are the result of the following:
- A shortage of personnel. The previous government under former ECB president and Goldman Sachs bigwig Mario Draghi instituted a plan to hire people ad hoc. It has flopped as the low pay and short term contracts aren’t attracting anyone, which leads to…
- The procurement process grinding to a halt. Despite efforts to follow Brussel’s edicts and remove bureaucracy, nothing happens. As Italian experts predicted, “removing bureaucracy is of little use if whoever has to oversee the work does not have the skills to manage it.”
- A rise in costs. The EU being party to the war against Russia in Ukraine has resulted in higher costs due to the higher price for energy and the ECB interest rate hikes.
- The possibility that the EU is intentionally sabotaging the process. Brussels is taking longer to approve Italian plans and there is much more negotiating than when Draghi was in office.
The Superbonus Gets the Ax
The superbonus for building renovation, under which homeowners could get 110 percent of energy efficiency renovation expenditures covered by the government, was adopted in the wake of the coronavirus pandemic in an effort to restart the Italian economy.
But the Meloni government, strapped by energy crisis spending and tax cuts for big business, slashed the program so it only covers only 90 percent of the cost and lessen its impact on this year’s finances. Former prime minister Giuseppe Conte said the measure created 900,000 jobs and helped homeowners save an average of 964 euros per year. That economic stimulus is now gone.
The effect is likely already being felt in the slowing economy, and the abrupt cancellation is causing a major headache for companies, households, and banks: how to recover an estimated 20 billion euros of credits for work that has already been completed or committed to, but the government hasn’t paid out. From Reuters:
Facebook support groups have popped up, telling horror stories of blocks of flats left uninhabitable after construction firms pulled out mid-way through major renovations, or of homeowners left nursing huge debts with no relief in sight.
“The state promised people that they would get their money back. They encouraged people to do this work, and then they went back on their word. It is a disaster,” Pierangeli said.
Banks have said there are more tax credits in circulation than they can deduct from their own tax bills. The government has contested this, but is also looking into the idea of letting banks keep tax returns paid through their system by clients.
Ministers have also sought to reassure banks they will not be held responsible if it transpires the credits are fraudulent, generated by cowboy building firms for fictitious work.
Prior to the war in Ukraine, Italy imported around 40 percent of its gas from Russia and has been forced to try to make up the difference with LNG imports and increased deliveries from Algeria. In response, Rome recently bailed on previous climate commitments. From Reuters:
While Italy is still in discussion with the European Union about the fate of a number of green directives, it unilaterally walked away from a pledge made at the 2021 Cop26 summit in Glasgow to turn off the funding taps for foreign fossil fuel projects by the end of last year.
The country’s export credit agency SACE said in a statement that it would continue to support oil distribution projects until January 2028, and oil storage and refining programmes until January 2024.
It declined to set any timetable to withhold funding for gas projects in these three areas.
While the cancellation of the Superbonus hurts the economy in the present, the climate policy will increasingly put Rome at odds with Brussels’ climate agenda moving forward.
Basic Income No More
Italy’s Five Star movement came to power in 2018 with an ambitious program for Italy’s working class. Its draft budget plan called for an increase in the public deficit, a tax amnesty for lower incomes, pension reform allowing early retirement, and a basic income for citizens.
It was subsequently harassed by Brussels and threatened with the dreaded excessive deficit procedure. One of its few achievements (along with the above-mentioned Superbonus) was a measly citizens’ wage that provides the unemployed an average of 567 euros a month.
Well, on March 31 Meloni celebrated her abolition of the basic income. Despite the program providing a mild stimulus to the economy, Meloni said its elimination will force people back to work. “Where is the slump in the economy and employment?” she asked.
She failed to mention that roughly 40 percent of Italian workers earn less than 10 euros an hour in the country where average wages have fallen 2.9 percent since 1990. Italy doesn’t even have a minimum wage and Meloni’s ruling coalition has no interest in introducing one (nor does the opposition).
Meanwhile, masses of young Italians under 35 are emigrating abroad as their employment prospects are so dismal at home. We’ll have to wait and see, but Meloni’s elimination of basic income might only exacerbate this trend. Money that could have gone to continuing the reddito di cittadinanza will continue to be used to deal with Italy’s higher financing costs and energy bills.
Rate Hikes and Energy Costs
The ECB most recently raised rates by 50 basis points to 3 percent in mid-March. Policymakers remain committed to more hikes, albeit at a possibly slower pace, until inflation is down to the two percent target. The obsession with core inflation might be misguided…
Market commentariat makes 2 mistakes: a) “But “core inflation” is still too high”; b) So, “more rate hikes are needed”. The target of policy is headline inflation (what counts for consumers). “Core” inflation only matters if it is a good predictor of future headline inflation 3/
— Vitor Constâncio (@VMRConstancio) March 31, 2023
…but the ECB plans to stick with it nonetheless. This fight against inflation has driven up the cost of Italian borrowing to over four percent, which eats away at Rome’s budget.
Although energy costs fell slightly in March, they are still the main driver of inflation in Europe over the past year. And the primary reason they’re up is because the EU, as junior partner to the US, is in a fight against Russia and cut itself off from Russian energy.
Italian manufacturing saw a slight reprieve in February as manufacturing input costs fell for the first time since June 2020, but they are still uncompetitively high. Prior to February manufacturing activity had contracted for a seven months running as firms began self-rationing over the summer. That came despite Rome diverting money from other programs in order to shovel it at the energy crisis.
Rome is spending more than 21 billion euros to help companies and households pay electricity and gas bills in just the first quarter of this year. And it’s working on extending those relief measures for the remainder of this year, and will almost certainly have to extend them further. That comes on top of the roughly 75 billion euros Rome spent on energy assistance last year.
At the same time, the Meloni government is trying to lower the country’s public debt, which is likely to only make matters worse. Should the Italian economic situation deteriorate enough to the point a selloff in Italian bonds occurs, Rome would have no choice but to turn to the European Stability Mechanism (ESM), which was set up in 2012 after the sovereign debt crisis and aims to help bail out countries in exchange for strict reforms (think Greece-level austerity and privatization).
Trouble is, Italy is still the only Eurozone country not to approve reforms to the ESM. Those include “a stronger role in future economic adjustment programmes and crisis prevention. In addition, the application process for ESM precautionary credit lines will be easier, and the instruments will be more effective.”
Italian officials say approval of such terms would increase the risk of a restructuring of Italy’s national debt, the loss of what little economic sovereignty Italy has left, and a further deterioration in standard of living should the country have to turn to the ESM.
It should be noted that some Italy observers think Meloni and company’s public opposition to ESM reforms is just part of the show:
It’s ALWAYS the same performance, whether the actor is called Five Stars or Brothers of Italy. And each one eventually bows to the inevitable.
Stop taking this stuff seriously, as if it deserved to.
— Daniele Albertazzi (@DrAlbertazziUK) December 17, 2022
This is starting to look like just another act in the continuation of Italy’s decades-long neoliberal project that has destroyed most Italians’ standard of living. The central cast is new (the purported fascist) and the crisis plot has been rewritten (energy and inflation), but the story remains the same.