Draghi Has the Right Plans for Italy

Let’s hope politicians and civil servants will carry them out.

Mario Draghi
European Central Bank president Mario Draghi makes a speech in the European Parliament in Strasbourg, January 15, 2019 (European Parliament/Daina Le Lardic)

Two months ago, I argued Mario Draghi understands what Italy needs. Here it is.

The former European central bank chief, prime minister since February, has unveiled €221 billion in proposed investments, spread over six years. €191 billion would come from the EU’s coronavirus recovery fund.

The proposals look good on paper.

The plans

  • €57 billion for the green energy transition, including investments in hydrogen and Italy’s electric grid. 40 percent of the money would go to making houses more energy-efficient.

Italy is a green frontrunner in Europe. It has invested in nuclear, solar and wind, and is poised to make strides in the coming years. Before Draghi released his plan, the International Energy Agency cautioned that regulatory uncertainty could discourage private-sector investment. He wisely avoids rewriting the strategy that is already in place to phase out fossil fuels.

The previous government allowed Italian homeowners to finance 110 percent of renovations for energy efficiency, such as insulations and the installation of solar panels, through tax deductions. The scheme has, if anything, been too successful, so the extra money is welcome.

  • €42.5 billion for digitalization (including €12 billion for digitizing government), innovation and competitiveness, including by rolling out broadband Internet countrywide.
  • €23.5 billion for sustainable mobility. Most of the money would go to rail, including north-south rail connections, and modernizing ports.

Italy ranked fourth to last in the EU for digital competitiveness in 2019.

Faster Internet and rail could help mend the country’s north-south divide. Currently high-speed rail doesn’t extend farther south than Naples. The last government spent too much time bickering over a high-speed rail connection between Turin and Lyon. What Italy needs is a faster line between Rome and Palermo

  • €30 billion for education.

Italy spends less on tertiary education that its neighbors. The result: only 27 percent of Italians in their thirties have a higher degree, the second-lowest rate in the eurozone, where the average is 40 percent.

  • €12.6 billion for labor, including money to stimulate women to work or start a business.

Only half of Italian women are in work, the lowest female labor force participation rate in Europe. Italian men are twice as likely as women to be involved in starting a business.

The bigger labor-market problem, though, is not about money per se but about regulation. Excessive licensing requirements make it almost impossible for Italian men as well as women to start a career as a lawyer, notary, pharmacist or even a taxi driver. Strict labor laws make it almost impossible to fire employees. The result is a two-tiered labor market where young workers can’t find job security and older workers are stuck in well-protected jobs.

  • 40 percent of all spending would go to the south.

Commerce and industry are concentrated in Italy’s north, where incomes and living standards are comparable to France, Germany and the Low Countries. The south is a different country. It is plagued by low birth rates, high unemployment and brain drain. One in three Italians lives south of Rome, but the region produces just a quarter of the country’s GDP.

  • Reorganizing the Italian justice system. Hiring extra staff to resolve long-running cases. Simplifying procedures, including for permits and procurement.

Italy’s courts are notoriously slow. Civil cases take 8 years on average to resolve. Previous governments made improvements, but a backlog of cases keeps the average down.

Italy is also one of the worst countries in the developed world to start and run a business in. It takes too long to get permits, to enforce contracts and to resolve bankruptcies.

No wonder foreign investors prefer to put their money elsewhere.

What’s next?

The European Commission must vet the proposals that require EU funding.

Assuming Draghi gets the go-ahead from Brussels, his challenge will be:

  1. Convincing the political parties that support his government to see the reforms through; and
  2. Convincing civil servants and local politicians to carry them out.

Italian bureaucracy isn’t just slow, it’s obstinate. Officials can take years to implement reforms, sometimes because they hope the next government will overturn them.

Which happens. One of Draghi’s predecessors, Matteo Renzi, painstakingly negotiated labor reforms that made it slightly easier for firms to hire and fire workers. In a concession to trade unions, the changes were not applied to existing contracts. In a concession to businesses, tax credits were provided to hire workers under the new rules. Four years later, the liberalizations were nevertheless withdrawn by Renzi’s successor.