MNI EXCLUSIVE: Italy Elections Threaten Coalition, EU Aid

Italy's fragile government coalition faces a crucial test in autumn regional elections, when the hard task of drafting a credible plan to obtain European Union post-pandemic rescue funds risks being derailed by spiralling political instability, lawmakers and analysts told MNI.

The center-right opposition, headed by Matteo Salvini's far-right League, has clinched strong local alliances, and may prevail in four out of seven regions in the elections to be held together with a constitutional referendum on Sept. 20-21, according to polls. Such a result could exacerbate internal divisions within the governing coalition formed last year between the populist Five-Star Movement and the center-left Democratic Party, together with minor leftist groups, while a landslide win by the center-right could deal a possibly fatal blow to Prime Minister Giuseppe Conte's government.

Any government crisis would also risk derailing crucial negotiations with the EU over the "Recovery Plan", which must be submitted to Brussels in early 2021 to obtain up to EUR209 billion in pandemic emergency grants and loans. It would also complicate approval of the next budget law, due by the end of the year, government lawmakers and political observers noted.

"The results of the elections will inevitably reignite the internal debate within the parties and the government," Sergio Battelli, head of the Lower House's EU Policies Commission and a Five-Star lawmaker, told MNI.

"But we can't miss this unique opportunity due to ideological divisions. It would be a sign of political irresponsibility and would be unforgivable," he added, noting that the recovery fund's resources are vital for relaunching growth.

STRUGGLE TO MEDIATE

Battelli stressed parliament will have a key role in outlining the recovery plan, involving constant dialogue between government and opposition, as its projects need to be widely shared before being submitted to the EU.

Conte is increasingly struggling to mediate between the fractious coalition partners, despite the popularity gained for his handling of the coronavirus emergency, which has claimed more than 35,500 lives and plunged the country into its worst recession in decades.

The two main parties, which rely on a thin parliamentary majority, are split over key economic policies. For months, Five Star has blocked any suggesting Italy might tap European Stability Mechanism pandemic loans, arguing that they would come with strict fiscal conditions, while the Democrats want the money in order to repair Italy's battered health system.

Democrats and Five Star are also divided ahead of the upcoming constitutional referendum on a reform to slash the size of parliament. The PD remains sceptical, but Five Star has championed the reform, hoping to revive its electoral support.

With Italy set to be the biggest beneficiary of the EUR750 billlion Next Generation EU pandemic aid programme, debate over the recovery plan will be crucial.

RECOVERY PLAN TO BOOST GROWTH

Draft guidelines, unofficially unveiled on Thursday, were in line with European Commission recommendations for addressing Italy's structural problems, focusing on seven macro "clusters", including digitalising public administration, "green revolution", boosting competitiveness, new infrastructure and mobility, education and training, equity and social inclusion, and health.

It included targets to double growth from the past decade's annual 0.8% and to boost Italy's employment rate by 10 percentage points to match the EU average at over 73%.

"The guidelines head in the right direction," Enrico Letta, a former premier with long experience within EU institutions, told MNI. "The government is now setting the framework for the Recovery Plan, which needs to be detailed with specific projects next year. That's the real test and cannot be failed."

More than 600 proposals – coming from different ministries and regions -- have already landed on the government's table. The challenge will be to avoid dispersing funds among myriad minor projects, some recycled. Projects must align with the plan's strategic targets, include clear costing, a defined timeline and have a significant impact on growth and employment.

"The risk is replicating the conflict between the state and the regions already seen over EU structural funds," Marcello Messori, director of the LUISS School of European Political Economy, told MNI. "This is a historic chance for Italy to regain its role in Europe and make national policies converge with European ones. It cannot be wasted."