The ambitious scheme seeks to boost growth and drive reforms, but it will require sustained political support.
Italy’s €235bn Resilience and Recovery Plan (RRP), which pairs EU funds with national commitments, seeks to reboot the country’s economy over the next five years. The investment is part of the €800bn Next Generation EU economic relaunch package, following the Covid-19 pandemic.
The RRP involves additional spending worth 10% of gross domestic product (GDP) until 2026, alongside a package of ambitious structural reforms. More than half the plan focuses on greening Italy’s economy and digitalisation. On top of this, there will be increased spending on education and research, infrastructure and sustainable mobility, and social cohesion and health.
“It’s a huge programme focused on broader structural objectives,” says Jack Allen-Reynolds, senior European economist at Capital Economics.
The plan has huge potential to raise aggregate demand over the next six years, which could have a big impact on Italy’s banks
The government of prime minister Mario Draghi has put significant emphasis on institutional reforms. Mr Draghi, a former president of the European Central Bank, was sworn in to lead a national unity government earlier this year after Italy’s previous coalition collapsed amid the fallout from the Covid-19 pandemic.
The RRP seeks to reform the public administration and justice systems, which Mr Draghi argues are vital to achieving the plan’s objectives, because reform will improve the overall efficiency of the Italy’s public sector and boost competitiveness.
“One of the reasons Italy has struggled in recent decades is not because of a lack of public investment – it has been held back by structural problems and a difficult business environment. The legal system can be slow and complex. If the RRP can help to resolve those issues, it could really boost long-term potential GDP growth,” Mr Allen-Reynolds says.
Banking sector boost
The spending could directly add 1.5–2% of GDP over the medium-term, according to Oxford Economics.
“The plan has huge potential to raise aggregate demand over the next five years, which could have a big impact on Italy’s banks,” says Mr Allen-Reynolds. “A stronger economy is good for the banks, particularly if it generates a bit of inflation and interest rates rise sooner than they would have done, which would boost banks’ profit margins.”
About a third of the RRP’s funds are devoted to construction. Giorgio Di Giorgio, professor of monetary theory and policy at Luiss University in Rome, says the planned infrastructure buildout – with its focus on public–private partnerships – will provide significant opportunities to the financial sector.
“The private sector, including the banks, will provide the funds for infrastructure projects,” Mr Di Giorgio says. “In particular it will benefit Italy’s two biggest banks, Intesa Sanpaolo and UniCredit.”
Mr Allen-Reynolds says other opportunities for banks may lie in Italian government plans to incentivise investment in digital projects and green technology. “Banks may want to ensure they are well positioned to support those investments,” he says.
Scepticism and caution
Despite the ambitious scope of the RRP, there are reasons to be cautious about the reform agenda’s chances of success, says Maddalena Martini, an economist at Oxford Economics.
Italy has struggled to spend previous European funds because of underlying institutional shortfalls which are not easy to remedy, she says. “Italy doesn’t have a particularly good track record with using the EU funds,” she adds.
Moreover, the reform agenda will require robust and sustained political support over the next five to six years, which is ambitious given Italy’s turbulent political history. The country has had 69 governments since the end of the Second World War, an average of one every 13 months. “The main risk we see to the recovery plan is political discontinuity,” Ms Martini adds.
The EU could block the disbursement of funds if investment and reform targets are not met.
“Politically, it’s very difficult to push these reforms through. We have already seen some pushback against a plan to speed up public works, with unions threatening to strike because it could lead to lower work safety standards,” says Mr Allen-Reynolds. “These reforms are going to be very difficult and they are going to need governments willing to push them through over a prolonged period.”
