Draghi Bets 261 Billion Euros on Redesign for Italy Economy

Draghi Bets 261 Billion Euros on Redesign for Italy Economy

Premier begins pushing his ‘historic’ plan through parliament. Program draws on EU recovery fund, twins investment and reform

Prime Minister Mario Draghi has just days to perfect and finalize what he’s calling a “historic” project to rescue Italy’s economy from the pandemic and fix its structural weaknesses, using 261.1 billion euros ($315 billion) of mostly European Union funds.

A lot is riding on the plan. If it works, it would overturn the fortunes of an economy long regarded as potential “ground zero” for major European crises. The government estimates that the windfall from the mainly EU grants and loans will boost economic output by about 3.6% by 2026.

For the European Central Bank, which has been backing Italian bonds through an unprecedented stimulus, it could mean winding down that support earlier than expected, according to Bloomberg Economics.

Draghi replied to lawmakers in the lower house of parliament on Tuesday morning, and he’ll address the Senate in the afternoon, a day after unveiling his blueprint. A cabinet meeting on Wednesday or Thursday is expected to give final approval before the Italian proposal is sent to Brussels by an April 30 deadline.

Read More: Draghi Says Italy’s Fate on the Line With EU Recovery Plan

Germany and France, the two countries instrumental in the creation of the stimulus package, will present their plans jointly on Tuesday at 2:30 p.m. local time.

About 40% of Italy’s funding will be allocated to green programs and 25% to digital projects, with priorities including infrastructure and high-speed trains.

“Green transition should involve all industrial sectors, and it is a cross-areas priority in our plan,” Draghi said Tuesday, in his response to lawmakers’ questions on the plan. “We’re investing in this well beyond the EU target of 37%.”

The package drawn up by Draghi, a former chief of the European Central Bank who heads a broad coalition, comes on top of over 170 billion euros passed in economic stimulus since the start of the pandemic last year.

“The measures proposed in the spending plan are intended to raise the long-term supply potential of the economy,” David Powell, senior euro-area economist at Bloomberg Economics, wrote in a note. “The benefit will depend on how efficiently it’s implemented.”

Mammoth Debt
Issues for Italy include its mammoth debt, which will rise to nearly 160% of economic output due to the added spending. The debt poses a long-term risk to the country, as well as the EU, and many economists agree the only solution at this point is to try to grow out of it. That’s not an easy task for an economy that contracted almost 9% last year.

Currently, Italy is also protected by European Central Bank bond-buying that’s keeping the cost of debt manageable. A solid recovery in Italy would reduce the risks when the ECB winds down its asset purchases.

“Sustained growth of well above 1% per year after Covid-19 seems very optimistic,” Dennis Shen of Scope Ratings wrote in a report. “We expect the Italian debt ratio to remain on an upward trajectory longer term.”

By John Follain and Alessandra Migliaccio

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