Italy and next generation EU: Economic and political unknowns

Key Points

• Italy’s ambitious Recovery and Resilience Plan is on track. Having met the objectives and milestones it was supposed to by mid-2022, the Italian government has requested another €21 billion instalment from the European Commission under Next Generation EU.

• Despite the risk of a recession-induced sovereign debt crisis at the beginning of the pandemic, Italy quickly returned to strong growth. This trend continued until the beginning of 2022, before the war in Ukraine and supply-chain problems led to a worsening economic outlook.

• The monetary policy tightening expected from the European Central Bank (ECB) in July and September to counter eurozone inflation has added to concerns over Italian growth and hence the sustainability of the country’s public debt. Given the size of its economy, Italy’s fiscal problems could have devastating consequences for the eurozone.

• There is uncertainty too as to whether Prime Minister Mario Draghi will be able to deliver further reforms envisaged under its Recovery and Resilience Programme before the next general election due in spring 2023, the outcome of which will be very consequential for Italy’s long-term growth.