MNI EXCLUSIVE: Italy's ESM Deadlock Complicates Budget Plans

Italy's governing coalition is unable to break a deadlock over reform of the European Union's bailout fund, despite a strong performance in regional elections and pressure from the EU, meaning that EUR37 billion in earmarked funds are unlikely to be included in the upcoming budget law, lawmakers told MNI.

In closely-watched elections last month, the partners in the uneasy governing alliance led by Premier Giuseppe Conte held on to three large regions out of seven, including the historically leftist bastion of Tuscany. But, while the win strengthened Conte, he is presiding over a stalemate on whether to tap money made available to Italy from the European Stability Mechanism's pandemic credit lines.

The anti-establishment Five-Star is firmly opposed, saying the money would come with onerous conditions, and lawmakers told MNI the wrangling with the movement's centre-left coalition partners in the Democratic Party is spilling over into crucial negotiations over a plan to rebuild Italy's post-Covid-19 economy, which must be presented to the European Union to qualify for assistance from the bloc's EUR750 billion recovery fund.

The Democrats want to channel the ESM funds to Italy's healthcare sector, nearly doubling the budget law's likely total EUR40 billion in allocations, which come on top of existing spending plans. But, to the consternation of officials in Brussels, Five-Star lawmakers are also refusing support in parliament for the ratification the EU's planned overhaul of the ESM, without which the Single Resolution Fund mean to oversee eurozone bank restructurings will struggle to operate effectively.

POLITICAL CHOICE

"We do not want to make Italy the battering ram for the use of these funds," Laura Agea, Italy's undersecretary for EU affairs and a Five-Star member, told MNI, adding that the ESM's credit lines bring the risk of stringent fiscal surveillance and even a worst-case scenario in which Italy could find itself under the thumb of a Greek-style "troika" of creditors.

The Democratic Party denies that the ESM loans, which come largely free of conditionality, present a risk to the country's fiscal autonomy. But it is struggling to win over Five-Star.

"We need to make a political choice, but unfortunately there's no agreement on including the ESM funds in the budget draft," the Democratic whip in the lower house of parliament's EU Committee, Piero De Luca, told MNI. The EU's ESM overhaul would be a "positive result" for Italy, he said.

"We are working with (Finance Minister Roberto) Gualtieri on improving the ESM. That would be a victory also for Italy, but unfortunately what should remain a technical debate becomes a political campaign," De Luca said.

RECOVERY PLAN

After weeks of frantic negotiations, the government reached agreement earlier this week on an economic outlook which sets the framework for the budget, including projected fiscal deficits of 10.8% of GDP in 2020 and 7% in 2021. This is set for cabinet approval by Sunday, starting the process for the budget to become law by the end of the year.

But arguments over the ESM look set to complicate the process, and opposition lawmakers say the coalition's internal discord could also delay the recovery plan needed to qualify for Europe's Covid fund, which Conte insists will be drafted by Oct. 15. Up to EUR209 billion would be available from the fund, although, unlike the ESM money, it would not be available until the second half of the year.

Tapping ESM credit lines could save the government interest costs of EUR500 million a year, according to the Bank of Italy, but this looks unlikely to be the case for now.

"I'm afraid there won't be a euro from EU funds in the upcoming budget law," Renato Brunetta, a lawmaker from the opposition Forza Italia party told MNI. "There's a culpable delay on the ESM, the government is holding up any decision."

Brunetta added that EUR40 billion in emergency funds, earmarked by the government at the peak of the pandemic outbreak, have still not been used, and it remains unclear whether they will be included in next year's budget.

"The government is late with both the ESM and the recovery plan and this is going to add to European delays, especially in the recovery fund ratification process. I'm sure we're in for a wild ride," he added.