Now, Italy is cycling towards more trouble

Franco-German plan for a 500 billion-euro ($548 billion) “recovery fund” for the European Union has raised the hackles of a group of smaller countries, made up of Austria, the Netherlands, Sweden and Denmark. The so-called “frugal four” believe the EU should only loan the money to the countries most affected by the Covid-19 pandemic, rather than giving it away in grants as has been proposed by President Emmanuel Macron and Chancellor Angela Merkel.
At the heart of the concerns of more fiscally cautious northern European countries is whether needier southern states such as Italy and Spain will spend the emergency pandemic cash appropriately. Italy, for example, has just promised to subsidise the purchase of new bicycles for all of its city dwellers — giving back 60% of the cost up to a total subsidy of 500 euros ($545).
That would buy you a pretty nice bike and might look overly generous even to those who believe the EU should be clamping down on carbon emissions.
The rearguard opposition to the Merkel-Macron plan from the Austrians, Dutch and others comes less than a week before the European Commission will make its own proposal for the fund. The frugal four might water down what could be the EU’s most significant move in years towards a much-needed “fiscal union.” However, the revolt points to a fundamental problem at the heart of any EU-wide system of fiscal transfers: Who decides how the money should be spent?
France and Germany believe that the fund should “enhance the resilience, convergence and competitiveness of the European economies, and increase investments in particular in the digital and green transitions, and strengthen research and innovation.” Such lofty language is, unfortunately, open to interpretation. Member states will disagree on what fits into these very broad categories and the Commission will have a hard time adjudicating between them. This conflict — alongside any perception of possible waste — will inevitably have an impact on the euro zone’s solidarity as we emerge from the Covid-19 crisis.
Italy is a useful example. Laura Castelli, the country’s deputy finance minister and a leading lawmaker in the ruling Five Star Movement, said that she expects Italy will receive up to 100 billion euros from the fund. That’s a big share of the pot. She said she’d like to use the money to support tourism and restaurants, which have been hit hard by the crisis. There’s no doubt that the hospitality industry will need assistance, but is this really how Germany and France would want the emergency money to be spent? It doesn’t exactly fit into even that very broad ambition for funding “digital and green” projects. The irony is that Italy has been struggling for decades with its own problem of unconditional fiscal transfers. The country’s richer northern regions have deeply resented wasteful public spending in the poorer south.

—Bloomberg