Political instability costs Italy – After the bond, worries about the money of the Recovery Fund

The European Commission has sent a clear message to Italy’s political world that the country will not receive funds allocated to it from the European Union’s Recovery Fund if it does not adhere to the reform and investment program agreed last year between the European Union and the Draghi government.

“You know the Latin saying ‘pacta sunt servanda’, agreements must be kept,” Italian Commissioner Paolo Gentiloni told the Financial Times a few days after the collapse of Draghi’s multi-party government, in yet another indication of the dangers posed by politics. instability, data and the serious parallel crises facing the Old Continent.

While the European Union’s third-largest economy has entered election season ahead of early voting on September 25, the Italian parliament will have until the end of the year to vote on reforms in the fields of competition, taxation and award speed, among other things. of justice, as the FT notes. In addition, in the autumn the Parliament will be asked to approve the annual budget.

“The implementation of the plan is of essential importance,” Mr. Gentiloni emphasized, referring to the national recovery plan that all member states submitted to receive resources from the EU Fund. The Commission’s message echoes the warning that sent a few days ago to all parties by the President of Italy Sergio Mattarella, that the “crucial” timely implementation of the national recovery program is based on the “conditional” provision of “necessary and important” Community funds. President Mattarella was an advocate of stability and that is why he initially rejected Draghi’s resignation.

Italy is the biggest beneficiary of the Recovery Fund, with a total of around 200 billion euros in grants and low-interest loans. Markets, however, appear quite anxious about whether September’s polls will restore the stability and credibility that the former ECB president brought to Rome.

*Markets shun and sell Italian debt*

Indicative of the “cost” of volatility is that the yield on the Italian 10-year bond has for a few days been worse than the yield on the corresponding Greek bond, despite the fact that the new debt purchase tool announced last Thursday by the European Central Bank is largely designed to allay concerns about Rome’s borrowing costs.

And the ECB itself, however, has taken care to send its own message against populism and instability, making it clear that the new bond purchase tool will only be activated with conditions, one of which is compliance with European fiscal rules.

Polls in Italy want the far-right Fratelli d’Italia to take first place. The party’s leader, Giorgia Meloni, has hinted that she wants a review of the national recovery plan to redirect the resources Rome has been receiving, but Finance Commissioner Gentiloni has made it clear there is little room for change.

Brussels will not accept “reshaping the plans from scratch or to a significant degree”, Mr Gentiloni told the FT, clarifying that the Commission can only consider modifications that reflect increased energy costs and inflation.

Italy has so far received 46 billion from the Recovery Fund, less than a quarter of the total it is entitled to. The request for the second tranche, amounting to 21 billion euros, is being evaluated by the European Commission. “This is a great opportunity for the country and I hope that whatever government takes over will stay on track,” noted Mr Gentiloni.