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How Italy plans to spend its €222 billion coronavirus recovery fund

Italy's governing parties meet on Friday to discuss revised plans to spend billions of euros in EU post-virus recovery funds after initial proposals provoked a crisis in the coalition.

How Italy plans to spend its €222 billion coronavirus recovery fund
Italian Prime Minister Giuseppe Conte in Brussels in December. Photo: AFP

The recovery fund is worth 222 billion euros in total, with most of it coming from a European Union fund allocated to help alleviate the economic impact of the coronavirus pandemic.

READ ALSO: How the EU agreed its €750 billion rescue plan to save shattered economies

Italy, which pushed hard for more EU support at the height of the crisis, is set to receive the largest share: 209 billion euros, or 28 percent of the entire rescue fund.

Under the leaked spending plans, 70 percent of the funding in Italy will go to investment and 21 percent for tax incentives and other bonuses.

The plan allocates 18 billion euros to the cash-strapped health service, with a further eight billion for tourism.

Other sectors to be prioritised are the transition to a greener economy (67 billion euros), education and research (26 billion euros) and transportation projects (32 billion euros).

Italy is due to submit its final plan to Brussels for approval by mid-April.

Prime Minister Giuseppe Conte has previously described the recovery fund as “an opportunity for us to design a better Italy, to work on a serious, comprehensive investment plan that will make the country more modern, greener, and more socially inclusive”.

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Economists say entrenched structural problems have put the brakes on progress for decades. They include Italy's burdensome public bureaucracy, sub-par infrastructure, including slow adoption of digital technology, and widespread tax evasion.

Italy has already pushed ahead with various policies aimed at encouraging people to use electronic payments rather than cash, including a 'receipt lottery', and with tax breaks on eco-friendly renovation projects.

Conte has however faced criticism for not allocating enough money for projects addressing long-term structural issues.

Conte will on Friday meet to discuss the revised proposals with representatives of government coalition partners Italia Viva, the populist Five Star Movement (M5S) and the centre-left Democratic Party (PD).

The leader of the small but pivotal Italia Viva party, former premier Matteo Renzi, has threatened to pull out of the ruling coalition over this and other issues, risking its collapse.

Reflecting the strain on the country's economy and public finances from the pandemic, Italy's public deficit reached 9.4 percent of gross domestic product in the third quarter of 2020, the national statistics agency Istat said Friday – up from 2.2 percent in the same period in 2019.

 

For the year 2020 as a whole, the government forecasts the deficit  – the shortfall between spending and revenue – will be 10.8 percent of GDP, against 1.6 percent in 2019.

The additional spending is expected to boost GDP by three percentage points.

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UKRAINE

Explained: Why and how Italy will pay for Russian gas in rubles

Italy has said it will comply with Moscow's demand to pay for its gas exports in rubles - so what does that mean exactly? Here's what you need to know.

Explained: Why and how Italy will pay for Russian gas in rubles

What’s going on?

At the end of March, Vladimir Putin issued a demand for countries deemed ‘unfriendly’ to Russia – including all EU member states – to start paying for Russian gas in rubles.

Poland and Bulgaria refused to comply, and Putin cut off their gas supply in retaliation. Finland has said it will join them, and is prepared to lose its own supply as as result.

READ ALSO: Italian energy company to start paying for Russian gas in rubles

Other European countries have been slower to resist. Hungary almost immediately accepted Moscow’s demands, and both France and Germany recently said that they had reached compromises that would allow them to continue receiving Russian gas without breaching EU sanctions.

The Italian energy company Eni, which is 30 percent owned by the Italian state, said in a statement on Tuesday that it was opening separate accounts in both rubles and euros with Russia’s Gazprombank “on a precautionary basis” in order to maintain its gas supply from Russia.

How would the payments work, and how is this different to what’s already in place?

EU countries would technically still be paying Russia in euros, but then authorising Gazprom’s bank to convert the payments into rubles under a system devised by Russia as a workaround that appears to circumvent sanctions.

Here’s the system Moscow’s proposing: foreign companies open two accounts with Gazprombank, the Russia’s third largest bank and the financial arm of the state-owned energy company Gazprom.

The foreign company would pay into the first account, in the currency stipulated in its contract with Gazprom (almost always euros or US dollars), but would authorise Gazprombank to convert the sum into rubles on the Moscow Stock Exchange.

Gazprom's logo on the Adler thermal power plant in Sochi. Putin has demanded that EU countries pay Gazprom in rubles from now on.

Gazprom’s logo on the Adler thermal power plant in Sochi. Putin has demanded that EU countries pay Gazprom in rubles. Photo by YURI KADOBNOV / AFP.

Gazprombank would then move the sum into the second account and make the payment to Gazprom in rubles, at which point the transaction would be considered complete.

Currently, 97 percent of all EU company contracts with Gazprom are in euros or dollars, according to Reuters. Usually, foreign companies would simply pay the energy giant directly in one of these currencies without going through these extra steps.

Why is Italy acceding to Putin’s demands?

Italy is highly dependent on Russian gas. 95 percent of its gas supply comes from imports, and 40 percent of these are from Russia. 

The country has tried to transition to other sources, most recently signing a deal to boost its gas supplies from Algeria. But despite its best efforts, Italy doesn’t anticipate being able to wean itself off Russian gas until 2025.

Eni CEO Claudio Descalzi had initially rejected Russia’s conditions, but on Tuesday the company announced that it had revised its position, saying the decision to open the accounts with Gazprombank was “taken in compliance with the current international sanctions framework”.

Is it a violation of EU sanctions?

The EU seems to be equivocating about whether the scheme is in breach of the bloc’s sanctions against Russia.

On May 13th, the European Commission reportedly issued revised guidelines to member states indicating that they could continue buying Russian gas without violating EU rules – but didn’t address Russia’s demand that buyers open an account in rubles.

READ ALSO: Italy builds first offshore wind farm amid push for energy independence

The EU has yet to issue clear guidance on whether complying with Putin's demands would breach its sanctions.

The EU has yet to issue clear guidance on whether complying with Putin’s demands would breach its sanctions. Photo by Alexander NEMENOV / POOL / AFP.

On Wednesday, however, Commission Vice President Frans Timmerman warned Italy that opening the two accounts was breaking the EU’s rules, calling it “a breach of the stipulated contracts, which say what currency to pay in… The contracts say euros or dollars, never rubles.”

Italy’s Prime Minister Mario Draghi had called on the Commission to clarify its position earlier this month, saying “if there is not clarity or a line of conduct then it is clear that each company or each country will do as it believes fit.”

Why does Putin want to be paid in rubles?

To shore up Russia’s struggling economy by creating more demand for the currency, boosting its value.

By March 7th, just days after Russia began its invasion of Ukraine, the ruble’s value had plummeted by 45 percent. When Putin issued his ultimatum, it quickly rose again – though remained at 22 percent below its value of before February 24th.

The demand has also had the convenient side effect of creating chaos and sowing discord in Europe, as different EU member states with varying degrees of dependency on Russian gas have very different ideas about how the bloc should respond to Moscow’s demands.

How will this affect people living in Italy?

If Italy is allowed to go ahead with Russia’s scheme – as it has already started doing – people in Italy are likely to be unaffected by the change.

Italy would still be paying the amount prescribed in its contracts, in the currency agreed upon in the contracts, so the price paid by the end consumer would remain the same.

READ ALSO: Italy extends energy bill discount and petrol tax cuts

If the EU bars member states from complying with Russia’s demands, countries like Italy and Germany that are particularly dependent on Russian gas will be left scrambling to come up with alternative energy sources faster than they anticipated – which is likely why Brussels has been hesitant about issuing an outright ban.

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