Why is Italy lagging behind in EU financial recovery targets?

The Financial Times has taken a closer look at Italy's financial health in regard to loans and assistances provided by the EU, especially under union-wide initiatives following the pandemic. Caliber.Az reprints this article.

"Even before Italy received the first tranche of its €191.5 billion package of grants and loans under the EU’s Recovery and Resilience Facility (RRF) there were doubts over its ability to use the cash windfall effectively. Rome has consistently underspent and failed to put EU funds to good use. At the current run-rate, it may end up spending only a quarter of its total RRF allocation — the largest of any recipient — by Brussels’ mid-2026 deadline. For an economy that is roughly the same size as it was just after the 2008 financial crisis, with a debt burden of 144.4% of its gross domestic product, that would be a huge wasted opportunity.

The RRF is the centrepiece of the NextGenerationEU programme, established in the aftermath of the Covid-19 pandemic to channel funds towards modernising Europe’s economy. Italy agreed to the package — its biggest aid programme since its post-second World War reconstruction — in 2021 under then-Prime Minister Mario Draghi. It included plans to strengthen the country’s fraying physical and digital infrastructure, alongside important structural reforms to boost its long-term growth potential.

But Rome has failed to keep pace with the agreed timetable. Italy was originally meant to spend just over €40 billion by the end of 2022 — it managed less than 60% of that, according to Capital Economics. The bulk of funds went towards tax incentives for construction and digitalisation, which supported the Italian economy last year. But spending on actual investment projects has so far been small. With Italy recently reporting problems on 118 of its 527 objectives overall, additional tranches from Brussels have been delayed.

The reasons cited for falling behind include managerial problems, high costs, and shortages of workers and materials. The collapse of Draghi’s national unity government last summer did not help. Prime Minister Giorgia Meloni and her allies say the plan they inherited from Draghi was flawed. There is some truth to that. Absorbing funds amounting to 10% of its GDP in five years was always going to be a tall order. For example, the aim to build over 200 km of new green public transport infrastructure in 16 cities was particularly hopeful.

The only way Italy could complete its original plan would be if the European Commission extended the deadline. That seems unlikely. Revising the plan makes the most sense. Meloni’s government has already sent 'corrections' to Brussels which scrap some public investments, including for urban renewal, and redirect funds towards energy infrastructure and green tax credits for businesses and households. Channelling more spending to these areas via the private sector is sensible, but the cancellation of much-needed public investment into dilapidated infrastructure would be a bitter blow.

Yet Meloni also wants to water down some structural reforms. These include improving public sector efficiency, boosting competition, and targets for cutting court backlogs and tax evasion. Many reforms are designed to support higher productivity growth, which can help put Italy’s public debt on to a more sustainable footing. Rowing back on these promises would be a mistake: Italy’s longstanding inability to spend and process EU funds stem from many of the challenges the reforms seek to address. As it is, loose drafting around the intended measures have led some to doubt much will change.

Italy is a marker for judging the success of the EU programme. It is in Brussels’ interest to rework the plan with Rome. Prioritising the most essential infrastructure projects, supporting green energy incentives and not letting structural reforms slide will be important. What happens in Italy — the bloc’s third-largest economy — matters for the European economy and its financial stability.

Italy needs more than €191.5 billion to turn its fortunes around. But utilising the RRF effectively would at least bring it a step closer towards jumping out of its decades-long low-growth malaise. If it fritters this package away, it is difficult to see the country rising out of its economic funk any time soon".