Italy’s Meloni needs the cash – POLITICO

Mujtaba Rahman is the head of Eurasia Group’s Europe practice and a columnist for POLITICO Europe. He tweets at @Mij_Europe.

To the surprise of many, Italy’s newPrime Minister Giorgia Meloni has proven to be very positive in her dealings with the European Union — unexpected given her aggressive anti-EU rhetoric over the past decade and the far-right post-fascist political tradition to which she and her Brothers of Italy party belong.

So far, however, Rome has avoided a fight with Europe. Is that about to change?

Meloni’s constructive approach to Europe is pragmatic — she needs the bloc’s cash. The Recovery and Resilience Facility (RRF), established in the aftermath of the pandemic, is set to dole out up to 10.5 percent of Italy’s GDP in soft loans and grants or, put differently, roughly 2 percent of its GDP per year until 2026.

Italy will also be assigned some additional funding this year as part of RePowerEU — the European Commission’s plan to top up and partly redirect RRF funds toward diversifying energy supplies — to the tune of €2.7 billion in grants and as yet unspecified loans.

It’s the RRF that turned the political dynamic between Italy and the EU on its head. Rather than being constantly scolded and threatened with sanctions for failing to abide by EU fiscal deficit and debt targets, Rome now must meet detailed reform and investment targets to qualify for large-scale EU funding — it’s what officials in Brussels call “results-based financing.”

While former Prime Minister Mario Draghi tackled many of the more controversial of these reforms, the new government has followed through on implementation. And the Commission is now reviewing Italy’s progress ahead of a fourth disbursement of around €19 billion, which is scheduled to be approved in the next two months.

Having already disbursed around €66.9 billion, the RRF has gone a long way toward improving Italians’ public perception of the EU, now at a post-financial crisis high. And though the real test for the RRF will be achieving lasting productivity gains over the long term, it’s also key to Italy’s growth outlook in the coming years, as well as the success of any political leader — at least until 2026, when the funding expires.

In another surprise, Meloni has also maintained steadfast support for Ukraine, primarily to remain in Washington and other EU partners’ good books. And she’s done so despite occasional grumbling from her junior coalition partners — Matteo Salvini’s the League and Silvio Berlusconi’s Forza Italia — and wavering support at home.

So far, these positions haven’t come at any significant political cost to Meloni. In fact, she’s been very successful in expanding her support among the center-right without alienating her party’s more radical base, as last month’s regional elections demonstrated.

With a deeply divided opposition, weak junior coalition partners and no real competition from within her own party, Meloni has a relatively free hand to pursue more amenable relations with Brussels.

And her shift isn’t merely tactical, it’s also longer term and strategic, reflecting her ambition to firmly occupy the center-right ground and establish Brothers of Italy as the main right-wing political force in the country — especially given the decline of Forza Italia and Salvini’s party.

But nothing should be taken for granted, especially as none of Italy’s core EU political and policy demands — whether on the revision of European fiscal rules, on more EU money to counter the United States’ Inflation Reduction Act (IRA) or on migrants — are likely to be met in the near future.

Although EU fiscal rules are currently still suspended, the pressure for Italy to start the process of debt consolidation is growing. However, a majority of domestic energy subsidies introduced after the war in Ukraine are only budgeted through the end of this month, and it is likely the government will extend them for the rest of this year.

Meanwhile, the debate over reforming the EU’s fiscal framework — the Stability and Growth Pact — isn’t going Italy’s way. A draft proposal by the Commission, which was designed to give highly indebted economies like Italy’s much longer to bear down on debt, is staunchly opposed by Germany. And negotiations are only likely to conclude after the European elections next year, once a new Commission is in place.

Italy is also one of the most vocal supporters of more EU common borrowing to help fiscally constrained member countries respond to the competitive threat posed to EU industry by generous IRA subsidies — what Internal Market Commissioner Thierry Breton has called a “Sovereignty Fund.” But with the bloc’s short-term response focused largely on a relaxation of state aid rules, nothing meaningful on this appears to be on the horizon.

And finally, there’s the EU’s policy on migration — always a core issue for Brothers of Italy but even more so now, given the sharp increase in migrant numbers from North Africa — which is also unlikely to materially change in Italy’s favor.

The government’s efforts have focused on cracking down on NGO ships rescuing migrants, while providing more political and financial support to authorities in Libya and other North African countries. However, a reform on EU migration policy is unlikely to be agreed on before the second half of the year — if even then. And still, it will likely focus on allocating more resources for border controls and returns — a wholesale review of the asylum system seems doubtful.

So, despite Meloni’s constructive tone so far — and her medium-term political aspirations — relations between Italy and the EU seem destined to become strained as the year progresses.

And if the bloc’s stance begins to cost her domestic public support, the likelihood of Meloni reverting to her more traditional anti-EU stance will grow.