Italy has problems that money can’t solve

For the past year and a half,
European Union leaders must have hoped that Italy’s political troubles were only a distant memory. The ongoing showdown between Prime Minister Giuseppe Conte and former premier Matteo Renzi shows that the lack of a stable and effective government in Rome remains one of Europe’s biggest challenges.
Conte only managed to scrape through a vote of confidence in Italy’s Senate, after Renzi chose to withdraw his ministers from the cabinet: He secured the support of 156 senators, less than an outright majority of 161 votes, while 140 rejected him. The PM — who had secured a slim outright majority in the country’s lower house — can remain in power according to Italy’s constitution. However, Conte now faces the prospect of becoming a lame duck as he tries to cobble together a new governing coalition to help him pass his agenda amid the difficulties of parliamentary life.
The EU must be watching this sorry spectacle with anxiety. For the past few years, Italy has been the weakest link of the euro zone as it grappled with a toxic combination of slow growth and populist politics. The rest of Europe has chosen to throw money at the problem: Italy is the main gross beneficiary of the EU’s 750-billion-euro ($911 billion) pandemic recovery fund. The European Central Bank (ECB) tweaked its asset-purchase rules temporarily so it can support the country’s government bonds when necessary. As a result, Italy’s government bonds are now near record lows. Investors expect the ECB and other countries to continue to stand behind Rome.
The continuing ineffectiveness
of Italy’s successive governments shows the limits of this strategy. After complaining about the lack of solidarity from the EU, Conte has struggled to put together a coherent plan to spend the grants and loans — worth as much as 209 billion euros — that Italy is set to receive. His government has only paid lip service to the idea of reforming the country’s often byzantine administrative system that continues to hamper infrastructure investment and trip up entrepreneurial spirits. And while Renzi has sought to replace the existing executive with a more dynamic alternative, for now he appears to lack political strength and popularity to topple Conte.
The overall result is one whereby the ECB and EU funds help the existing political players stay in power. However, they have to sit idly by as successive governments fail to act to lift the country’s abysmal productivity rate and bring growth back to near the European average. The ECB and the rest of the EU didn’t take these measures specifically to help Italy. The central bank is trying to hit its inflation target of “below but close to” 2% that has proven elusive. The European Commission is expanding its ability to raise debt on the financial markets, which could one day prove helpful in setting up an extended budget for the bloc.
—Bloomberg