Italy’s economic prospects improve as virus numbers fall further

Italy's statistics agency on Friday upgraded its growth forecast, with the economy set to improve faster than thought.

Italy's economic prospects improve as virus numbers fall further
Italy's prime minister Mario Draghi has reportedly carved out luxury goods from EU sanctions against Russia. (Photo by Miguel MEDINA / AFP)

Italy’s statistics agency Istat on Friday pointed to a faster-than-expected recovery from the coronavirus pandemic.

Istat predicted growth of 4.7 percent in 2021, up from the 4.0 percent growth forecast last December, and 4.4 percent in 2022.

The government, for its part, has forecast growth of 4.5 percent in 2021 and 4.8 percent in 2022.

READ ALSO: Fast trains and extended building bonus: How Italy’s EU recovery plan could affect you

Italy’s economy – the eurozone’s third largest – grew slightly in the first quarter, Istat said on Tuesday as it reversed a previous estimate of a contraction in the first three months of the year.

On Friday, Istat said it expected economic activity to intensify in the coming months, driven by domestic demand, and extend into 2022.

It said the government’s 222-billion-euro post-virus recovery plan, funded in large part by European Union loans and grants, “should provide a more intense stimulus”.

People enjoy bar and restaurant terraces along the Naviglio canal in Milan. Photo: Miguel MEDINA / AFP

Gross domestic product (GDP) was up by 0.1 percent compared with the previous quarter, national statistics office Istat said in a statement on Tuesday.

Agriculture and industry had contributed to the economic recovery in the first quarter, with quarterly growth of 3.9 percent and 1.8 percent, respectively.

Istat also said that employment in April rose by 0.1 percent from March.

However, the labour market is still depressed compared to pre-pandemic levels — in February 2020, employment figures were higher by 800,000.

Infection rates fall again

Italy was the first European nation to be hit by the Covid-19 pandemic and remains among the worst affected, both in health terms and economically, with GDP slumping by a staggering 8.9 percent last year.

However, infection rates are falling and the vaccination campaign has picked up speed, resulting in the lifting of many coronavirus restrictions.

CHARTS: How many people has Italy vaccinated so far?

Italy’s latest health data on Friday confirmed the downward trend had continued for another week.

The national average Rt reproduction number had dropped to 0.68 from 0.72, according to the latest weekly coronavirus monitoring report of the health ministry and the Higher Health Institute (ISS).

The report said for a third week in a row that all of Italy’s regions can now be considered low risk, with Rt numbers below 1.

This week, cafes and restaurants were allowed to serve customers indoors and sport stadiums reopened to the public as rules were eased further.

Coronavirus curfews were lifted from Monday in three regions with low infection figures, including tourist favourite Sardinia.

It’s hoped that the same easing of measures could be extended across most of the country in coming weeks.

“Italy is strong, alive and is yearning to restart. The pandemic months have been very tough, for workers and businesses,” Prime Minister Mario Draghi said during a visit in the northern Emilia Romagna region on Tuesday.

“But thanks to sacrifices made by Italians and the strong acceleration of the vaccination campaign, we are facing a new phase,” he added.

Italy is due to receive EU loans and grants worth 191.5 billion euros ($233.5 billion) between 2021 and 2026, and the government has pledged a raft of reforms to put them to good use in its recovery plan (‘piano nazionale di ripresa e resilienza‘ or PNRR).

The support measures put in place include funds for renovating energy-inefficient buildings and plans to upgrade public transport and wifi connections, as Italy’s government says it aims to use the money to upgrade infrastructure and make Italy a “country for young people”.

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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.