Priorities for new Draghi government: Obtain EU recovery funds, ramp up vaccinations

On Saturday, a new Italian government, headed by Mario Draghi, the former president of the European Central Bank, was sworn in by President Sergio Mattarella. The sighs of relief, after a crisis caused by disagreement within the government headed by Giuseppe Conte over how Italy should deploy the €209 billion in grants and loans available to it through the EU’s newly-created recovery fund, were audible not only in Italy but throughout the EU. There is no one in Italy, or indeed the EU, who has more credibility with the EU institutions in regard to economic matters than the man who famously—and presciently—said in July 2012, at the height of the eurozone debt crisis, “the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” When Draghi, who will personally oversee Italy’s relations with the EU, submits his government’s plan for spending the €209 billion in grants and loans to the EU, it will satisfy the EU’s criteria for the plan and will be approved.

The new government, the third in the last three years and the 67^th in the 76 years since the end of World War II, is, as Mattarella requested when he invited Draghi on February 3 to form a government, a broad “unity government.” It includes ministers from, and is supported by, the left-populist Five Star Movement (M5S) and the center-left Democratic Party (PD) – the two parties that supported the Conte government—as well as the centrist liberal Italia Viva (IV, Italy Alive) party created in 2019 by Matteo Renzi, the former mayor of Florence, regional president, prime minister in 2014-16 and former leader of the PD whose withdrawal of IV support for the government on January 13 prompted Conte to call for a vote of confidence and then, after winning the vote but, because of abstentions, falling short of a majority in the Senate, resign. It is also supported by the conservative Forza Italia (FI) headed by former prime minister Silvio Berlusconi and by the conservative, xenophobic and euroskeptic Lega headed by former deputy prime minister and minister of the interior Matteo Salvini. A broad coalition that includes all of the larger parties and is supported by some smaller ones as well, with the notable exception of the right-wing, nationalist Fratelli di Italia (FdI, Brothers of Italy), the government controls 90 percent of the seats in the Chamber of Deputies and Senate.

Conte, a lawyer and an academic, was appointed prime minister after the March 2018 election. In that election, the Five Star Movement and the Lega both won significant increases in their shares of the vote while Renzi’s PD and Berlusconi’s FI both suffered significant setbacks compared with their votes in 2013. In the vote for the Chamber of Deputies, Five Star won 32.7 per cent of the proportional vote, a gain of more than 7 percentage points compared with its vote in 2013 and 14 percentage points more than that for the next largest party, the PD. A populist, anti-establishment movement founded in 2009 by Beppe Grillo, a comedian and blogger, Five Star – the name refers to the five issues with which it was initially concerned (public water, sustainable transportation, sustainable development, the environment, internet access)—is concerned with the excesses of wealth and consumption, alongside the poverty, inequality and unemployment—in particular, youth unemployment—that exist in a capitalist economy, is broadly euroskeptic and at one point called for a referendum on leaving the euro area, and practices internal “electronic democracy” with online meetings and referendums to decide its positions on issues. Given the mélange of issues, it attracted widespread support among the young, those living in the south, those in the lower strata of the income distribution, and those believing Italy’s afflictions can be blamed largely, if not entirely, on the EU and the rules of the euro area. A substantial portion of Five Star’s increase in its share of the PR vote came at the expense of the PD, which won 18.7 percent compared with 25.4 percent in 2013, and the day after the election Renzi announced he would step down as PD leader.

The other big winner was the Northern League, which, for obvious reasons, runs in much of the country simply as the Lega. Founded in 1991 from regional movements supporting federalism and greater regional autonomy in Piedmont, Lombardy and elsewhere in northern Italy and headed by Salvini since 2013, the Lega moved rightward under Salvini and staked out a position as a nationalist, xenophobic and euroskeptic party, one that is opposed to the arrival in recent years of hundreds of thousands of immigrants and is opposed as well to the EU’s policies both with regard to immigration and to the operation of the euro area. Running in a coalition with Berlusconi’s FI and the far-right FdI, the Lega won 17.4 percent of the PR vote, a gain of some 13 percentage points compared with its 2013 vote. A significant portion of that increase came at the expense of FI, which won 14 percent, compared to 21.6 percent in 2013 for its predecessor party, People of Liberty. FdI, the third party in the coalition, won 4.4 percent compared with 2 percent in 2013.

After extensive consultations between Mattarella and the party leaders, in June 2018 Conte was appointed prime minister of a Five Star-Lega government. An improbable coalition, it was only a matter of time before one or the other would pull out, and in August 2019 Salvini brought a motion of no confidence in the Senate in a dispute with M5S over construction of the high-speed rail line between Turin and Lyon. Conte resigned but, instead of calling a new election as Salvini wanted, Mattarella asked Conte to form a new government. After considerable internal disagreement within the PD over participating in a government with Five Star—something Renzi advocated—the PD supported the formation in September 2019 of a second Conte government with Five Star. Despite winning the internal argument in the PD, however, Renzi left the party, taking with him a number of deputies and senators, and formed Italia Viva, which also supported the second Conte government.

The crisis that led Renzi to withdraw IV’s support for the Conte government in January involved a dispute within the government over how Italy should make use of the €209 billion in grants and loans—€81.4 billion in grants and €127.4 billion in loans—available to it through the EU’s newly-created recovery fund. Last April, the leaders of the 27 member states, meeting as the European Council, agreed to work toward establishing a recovery fund that would assist the sectors, regions and countries most affected by the Covid-19 pandemic and tasked the Commission with analyzing what would be needed, proposing a recovery plan commensurate with the challenge, and clarifying its link with the Multiannual Fiscal Framework, the seven-year EU budget for 2021-27 the Commission was preparing. In May, German Chancellor Angela Merkel and French President Emmanuel Macron proposed that the EU create a €500 billion recovery fund, financed by EU borrowings and disbursed through the MFF, that would provide grants to the sectors, regions and member states hardest hit by the crisis. Building on the Merkel-Macron initiative, the Commission proposed creation of a new €750 billion recovery instrument, Next Generation EU (NGEU), that would be embedded within a revamped MFF that would include, in addition to the NGEU funds, €1.1 trillion of spending in 2021-27. The funds for NGEU would be raised by temporarily increasing the EU’s “own resources” ceiling to 2 percent of the EU’s Gross National Income, which would allow the Commission to borrow €750 billion in the capital markets. The borrowed funds would be repaid over 30 years beginning in 2028. In order to service the debt, the Commission proposed several new sources of revenue, including one based on the emissions trading scheme, a carbon border adjustment mechanism, a tax on the operations of large companies, a new digital tax, and a tax on non-recycled plastics.

The Commission proposed that €500 billion of the funds be disbursed as grants and €250 billion as loans through three “pillars.” The first “pillar” would involve support for investments and reforms to address the crisis and would include a new Recovery and Resilience Facility (RRF) that would provide €560 billion—€310 billion in grants and €250 in loans—to member states for investments and reforms essential for a sustainable recovery. The “pillar” would also include €50 billion in additional funds for the cohesion policy programs through a new REACT-EU initiative to be allocated based on the severity of the crisis; €30 billion to strengthen the Just Transition program that assists the states in accelerating the transition toward climate neutrality; and €15 billion more for the European Agricultural Fund for Rural Development to support structural changes in rural areas consistent with the EU’s Green Deal. The second “pillar” would be aimed at “kick-starting the EU economy by incentivizing private investments” and would include €26 billion for a new instrument to mobilize private resources to support European companies in the sectors and areas most affected by the pandemic; €15 billion for an upgrade of InvestEU, the EU’s program promoting private investment in the EU; and €15 billion for a new investment facility in InvestEU to generate investment in strategic sectors linked to the green and digital transition. The third “pillar” would include €94 billion for Horizon Europe to support research in health, resilience, and the green and digital transitions; €16 billion for external action including humanitarian aid; €8 billion for a new health program, EU4Health, to strengthen health security and prepare for future health crises; and €2 billion for RescEU, the EU’s civil protection mechanism.

The Commission’s plan immediately encountered a firestorm of opposition from several states—most notably, the so-called “Frugal Four” (Austria, Denmark, the Netherlands, and Sweden)—that had strenuously objected to the Merkel-Macron initiative and, prior to that, to a proposal by the Eurogroup, the finance ministers of the EU states that are members of the euro area, subsequently approved by the European Council, to use a credit line facility in the European Stability Mechanism to provide up to €240 billion in precautionary credit lines to euro area member states needing assistance. The European Council discussed the Commission’s plan for several hours at its June meeting, after which European Council President Charles Michel said that, while there was “an emerging consensus on some points, we don’t underestimate the difficulties.” He said he would immediately start negotiations with the leaders and would prepare some “concrete proposals” for the mid-July European Council meeting.

At the July meeting, Michel proposed that the MFF be reduced slightly to €1.074 trillion and that the five member states that are net contributors to the budget—the “Frugal Four” and Germany—retain their rebates in real terms, on the basis of their 2020 contributions, and receive them in a lump sum. He retained the Commission’s proposal that it borrow up to €750 billion through an “own resource” decision that would enable it to service the debt but proposed a more gradual introduction of new “own resources,” dropped its proposal of a new tax on the operations of large companies, and proposed that it begin repaying the borrowings in 2026 rather than 2028. He also retained the Commission’s proposal to distribute €750 billion in grants and loans but, in order to ensure that the Recovery and Resilience Facility would be used to assist the countries and sectors most affected by the crisis, proposed that 70 percent of the funds be committed in 2021 and 2022 according to the Commission’s allocation criteria, with the remainder committed in 2023 after taking into account the drop in GDP in 2020 and 2021. In regard to governance and conditionality, he proposed that member states prepare national recovery and resilience plans for 2021-23 in line with the country-specific recommendations generated by the European Semester annual review of their fiscal policies and that the 2023 plans be reviewed in 2022, taking into account the modified allocation key, and be subject to approval by the Council by a qualified majority. He also proposed that 30 percent of the funding be made available for climate-related projects.

As the July meeting began, it was clear there were strong disagreements among the member states in regard to the size of the fund, the amount that would be disbursed as grants versus loans, the allocation criteria, conditions that would accompany grants, the process and criteria that would be used in approving the grants and loans, and subsequent oversight of the use of the funding. After five long days and evenings of meetings and discussions, the leaders eventually agreed that the Commission could, as it had proposed, borrow up to €750 billion on the capital markets to assist member states in recovering from the effects of the coronavirus pandemic. But in the face of strong opposition from some leaders to the Commission’s proposal that two-thirds of the €750 billion be provided as grants, the leaders agreed to reduce the amount to be distributed as grants from €500 billion to €390 billion and increase the amount available as loans from €250 to €360 billion. They also agreed to reduce the seven-year MFF by €26 billion to €1.074 trillion.

But the leaders also agreed to increase the size of the Recovery and Resilience Facility (RRF), the principal means by which the EU would support the recovery of the member states’ economies, from the €560 billion—€310 billion in grants and €250 billion in loans—proposed  by the Commission to €672.5 billion—€312.5 billion in grants and €360 billion in loans. They also approved €65 billion of grants for other uses under the Commission’s first “pillar”—€47.5 billion for ReactEU (the cohesion policy programs), €10 billion for the Just Transition Fund (to accelerate the transition toward climate neutrality), and €7.5 billion for the Agricultural Fund for Rural Development (to support rural areas in making structural changes)—as well as €5.6 billion in grants for uses under the second “pillar” (for InvestEU) and €6.9 billion in grants for uses under the third “pillar” (€5 billion for Horizon Europe-funded research on health, resilience, and the green and digital transitions, and €1.9 billion for RescEU, the EU’s civil protection mechanism), thereby providing a total of €77.5 billion in grants in addition to the €312.5 billion in grants through the RRF.

In order to receive funds under the €672.5 billion Recovery and Resilience Facility, the member states are required, as Michel proposed, to prepare and submit national recovery and resilience plans for 2021-23 that will be assessed by the Commission and adopted by the Council. The Commission provided the member states with guidance in September to assist them in preparing the recovery and resilience plans and it updated the guidance last month. According to the Commission guidelines, the plans, which the member states are expected to develop through intensive dialogue with the Commission, are expected to set out the reforms and public investment projects that will be supported by the RRF and present a balanced response to the economic and social situation of the member state. They are expected to contribute appropriately to the RRF “pillars,” devote at least 37 percent of expenditure to investment and reforms that support climate objectives, devote at least 20 percent of expenditure to the digital transition, contribute to effectively addressing the relevant challenges identified in country-specific recommendations under the EU’s European Semester framework of economic and social policy coordination, and contribute to strengthening the growth potential, job creation and economic, institutional and social resilience of the state. The final version of the plan is expected to be submitted to the Commission by April 30, after which it will assess, within two months, whether the investments and reforms set out in the plan represent a balanced response to the economic and social situation in the member state and contribute appropriately to all of the RRF pillars. After the Commission has assessed the plan, the Council will have up to four weeks to consider that assessment and, assuming both assessments are positive, adopt an implementing decision by qualified majority. All of which means the states may, if all goes well in the assessment and approval process, get the first tranche of 35 percent of the grants and loans under the RRF starting in August.

In December, the Conte government prepared a preliminary draft of its recovery plan that was immediately met with substantial criticism. Renzi argued that the draft, which allocated €9 billion to health services, €19 billion to education, and €3 billion to culture and tourism over the next several years, did not provide nearly enough for those domains of policy and for infrastructure investment. He also criticized the way the plan was prepared, behind the scenes and without sufficient parliamentary input, and the fact that monitoring implementation of the plan would be largely up to the prime minister and relevant ministers rather than the parliament. He also criticized Conte’s refusal to request support for Italy’s health systems via the new European Stability Mechanism facility approved in June. Conte responded to many of the criticisms in a revised draft that was discussed by the Cabinet at its January 12 meeting. The amounts proposed for investment in health services and culture and tourism were doubled and the amount to be invested in education and research was substantially increased. But he continued to reject the proposal to go to the ESM for health and hospital support and offered few specifics in regard to a governance mechanism, including whether, and if so how, parliament would be involved in monitoring implementation of the plan.

After the cabinet meeting, the two IV ministers submitted their resignations from the government and the next day Renzi announced IV was withdrawing its support for the Conte government. Conte said he would ask for a vote of confidence in Parliament and on January 18 he won a narrow victory in the Chamber of Deputies and then, the next day, an even narrower victory in the Senate, where he was supported by less than half of the senators but won the vote because of abstentions. After the Senate vote, he resigned.

In the discussions that followed Conte’s resignation, Five Star, the PD and some smaller parties supported the formation of another Conte government but IV supported continuation of a Five Star-PD-IV government only if Conte was replaced or, alternatively, a national unity government. The Lega, Forza Italia, and FdI—especially the latter, which was doing very well in the polls—wanted new elections, but Lega and Forza Italia were also willing to support a national unity government.

On February 3 Mattarella invited Draghi to form a national unity government. Last Wednesday Lega and FI said they would support a Draghi government, and last Thursday the PD national board said it would support a Draghi government and 59 percent of the members of Five Star voted in an online referendum in favor of participating in a government headed by Draghi. On Friday Draghi met with Mattarella and gave him a list of his ministers, and on Saturday Draghi and the new government were sworn in. The 24 ministers include four from Five Star, three from Lega, three from FI, three from PD, one from IV, one from a small center-left party and nine independents. Interestingly, the new minister for economy and finance, who will be responsible for the preparation of the RRF plan, is Daniele Franco, the director general of the Bank of Italy. Draghi, of course, was Governor of the Bank of Italy from 2005 until 2011 when he was appointed president of the ECB. Also interestingly, there is no minister for European Affairs, suggesting that Draghi will assume responsibility for EU affairs himself.

Last week the European Parliament formally confirmed the regulation agreed in December in regard to the €672.5 billion Recovery and Resilience Facility (RRF), the key instrument in the Next Generation EU recovery plan. As a result, the RRF will come into force later this month, after which the member states will be able to officially submit their national recovery and resilience plans, which will be assessed by the Commission and, if approved, adopted by the Council. The Draghi government has its work cut out for itself—preparing and submitting by the end of April a national recovery and resilience plan for deploying €209 billion in EU grants and loans to assist the country’s recovery from the economic and social consequences of the continuing Covid-19 pandemic. This isn’t the only challenge facing the new Draghi government; at least as important is the challenge of dramatically ramping up the distribution of the Covid-19 vaccines. But it is at least one that Draghi and his new government are well-equipped to address.

David R. Cameron is a professor of political science and the director of the European Union Studies Program at the MacMillan Center.