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Draghi’s recipe for Italy: deficit and public works

The Italian head of government and prestigious economist Mario Draghi, known as the savior of the eurozone with the motto “whatever it takes” when he was leader of the ECB, applies the same recipe to Italy: let the deficit skyrocket and invest millions of euros in public works.

At the same time, Draghi urged to accelerate the vaccination campaign against covid to maintain the program of gradual reopening of the various economic sectors hit by the pandemic as of April 26, “a calculated risk,” he announced.

“As the governments of the immediate postwar period, we have the responsibility to start the reconstruction,” explained the former president of the European Central Bank (ECB) when he took office in February.

Some thirty commissioners with special powers have been appointed to complete 57 infrastructure construction projects, bogged down in the legendary Italian bureaucracy, at a cost of 83,000 million euros (almost 100,000 million dollars).

These projects, part of which will be financed by the European recovery fund of 750,000 million euros (900,000 million dollars), aim to renovate or build new rail lines, highways and even ports.

This is expected to create 118,000 jobs before 2025, after almost a million jobs were lost in 2020 due to the pandemic.

The collapse of the Morandi Bridge in Genoa in 2018, which claimed the lives of 43 people, set off alarms about the country’s aging infrastructure.

– “Strong signal” –

“It is a very strong signal, it is about millions of euros in investments that were blocked for years, even decades,” Giuliano Noci, a strategy professor at the Polytechnic School of Milan, told AFP.

“They are crucial public works for the country,” he stressed.

With a first budget increase of 32,000 million euros, followed by another 40,000 million euros to finance stimulus measures, the public deficit will skyrocket to 11.8% of GDP this year, a record in the euro zone.

“Seen through yesterday’s eyes, that situation would be very worrying,” Draghi himself admitted.

However, circumstances have changed and the pandemic “has legitimized the creation of a lot of debt”, which will be repaid once “durable growth” is registered again.

The health crisis destroyed the European rules that established a maximum deficit of 3% of GDP and 60% for debt.

“The European Stability Pact no longer makes sense, it was designed 25 years ago, since then we have had first a financial crisis in 2010 and now the pandemic. The austerity policy has been shown to have been a failure,” estimated Giuliano Noci.

The shock therapy administered to the Italian economy, which has not grown for twenty years, would not be possible without the funds from the European recovery plan.

Rome is to receive the largest share, namely € 191.5 billion (about $ 229 billion) in grants and loans.

The third-largest economy in the euro zone relies heavily on that unexpected money, which is linked to the presentation to the European Union in late April of a detailed spending plan.

– Debt skyrockets –

While waiting for European funds, Italy’s public debt is skyrocketing and should reach a dizzying 159.8% of GDP in 2021, then gradually decline.

Italy’s debt is at the same level as Greece’s in 2011.

Could we have a new debt crisis in the euro zone caused by Italy?

“No, the situation is not comparable, because Rome does not depend on foreign investors to pay its debt, which is mainly in the hands of Italian banks and households,” Jesús Castillo, an economist at Natixis, told AFP.

Furthermore, “Italy has a trade surplus compared to the rest of the world and has a solid industry,” he added.

Furthermore, the ECB will not disappoint Italy because “it has the means to stabilize the financial markets and it has enough firepower to alleviate possible pressures on Italian interest rates.”

bh-kv / zm

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