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Italy Politics March 2020

Italy: Government approves EUR 25 billion stimulus package to shield economy from coronavirus blow

In a bid to counteract the significant economic fallout from the coronavirus (Covid-19) pandemic, Italy’s government unveiled two stimulus packages in the first half of March amounting to EUR 25 billion. Intertwining with the monetary expansion plans the ECB delivered in March, the packages strive to shield spending on essential items via job protection and income support, and to prevent small- and medium-sized enterprises (SMEs) defaulting by sustaining liquidity. The size of the stimulus, however, is relatively small and a severe recession is now all but inevitable. The country’s mountainous debt stock, which leaves the country exposed to significant fiscal stability risks, has constrained the government’s response and weighs on the outlook.

On 11 March, Italy’s Parliament authorized the government to increase the country’s deficit target by EUR 20 billion in 2020, with only broadly half of the total EUR 25 billion to be spent and the rest earmarked as a reserve for possible further interventions. Measures so far approved include additional financing for the health system and exporters; wage support for workers facing temporary layoffs in order to also sustain consumer spending and limit job shedding; the postponement of some tax duties not to weigh on already dried out liquidity; and boosting liquidity for households and SMEs through a loan guarantee scheme, in order to avoid foreclosures and bankruptcies.

Commenting on the fiscal measures adopted by the Italian government, Paolo Pizzoli, Italy senior economist at ING, added:

“This is all hoped to absorb some of the shock of the lockdown, but will not prevent the Italian economy from falling into a sharp recession in 1Q20. In the current circumstances, and given the very nature of the crisis and the high uncertainty about how it will pan out, just keeping viable social and economic conditions going to try to ensure a swift post-emergency recovery would be considered a big success.”

Looking ahead, the government is considering adopting further stimulus measures. However, both the spread of coronavirus and the especially tough restrictive measures adopted by the Italian authorities to combat it are set to take a heavy toll on economic activity. This is also truer in the case of Italy’s economy, where SMEs play a much larger role that in other countries of the Euro area. Moreover, the relevance of sectors particularly exposed to Covid-19 spillovers, such as the tourism industry and accommodation and food services, suggest the economy will be hit especially hard in the first half of 2020. Further clouding the outlook, the country’s burdensome public debt load and protracted political instability could trigger renewed financial turbulence.

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