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Super Mario’s Next Challenge
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Andrew Kositkun Senior FX Advisor
The EU Recovery Fund was a landmark initiative for EU integration even if it fell well short of being a Hamiltonian breakthrough. This is, in part, due to the fact that the implications of the EU Recovery Fund go beyond economics.
As an example, the overwhelming parliamentary endorsement Mario Draghi’s administration, including broad support from former Eurosceptic parties, likely would not have happened without the 210 billion euros in resources made available to Italy through the EU Recovery Fund.
Italy has always been the elephant in the room during discussions on the viability of the euro project. A key part of Draghi’s program will be his reform efforts that focus on improving the efficiency of the judicial system, reforming the tax system and streamlining a cumbersome bureaucracy that tends to lead to over-regulation — all areas identified by the European Commission in need of reform.
Moreover, Draghi has underscored the importance of EU Recovery Fund resources for Italy but has highlighted the difference between good debt linked to targeted, productivity-enhancing spending versus bad debt as a result of scattered policy measures. Notably, the new EU Recovery Fund means that reform is motivated by the carrot rather than the stick, as access to grants are dependent on the delivery of reform proposals and subsequent realization of those plans. As such, the success or failure of the Draghi administration will have ramifications beyond the Italian borders.
It is too early to say whether the Draghi government will be able to deliver on the reform front, but an approach based on clear incentives — reforms in exchange for fiscal support — is more promising than the prior mix of austerity and market pressure. In its current form, the EU Recovery Fund is not set to be permanent. But the fund will create a large-scale market for EU-issued bonds. Given the extent of the policymaking infrastructure created by the fund, it won’t be a great leap to see part of the Recovery Fund’s infrastructure become permanent. This includes the possibility for a larger EU budget that includes more direct tax-raising powers to be able to support countries in recession.
But for this to happen, northern countries have to see evidence that fiscal transfers are leading to growth-enhancing changes in the southern economies, with the Italian economy a particular point of focus.
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